Q3 2023 Investor Audibles: Cedar Creek Capital, Laughing Water Capital, & Alta Fox Capital

Episode Summary

Executive Summary: The transcript compiles Q3 2023 letters from micro/small-cap-focused managers Cedar Creek Partners, Laughing Water Capital, and AltaFox. Across the letters, the managers argue that macro fear and market structure have created attractive opportunities in underfollowed securities, while emphasizing patient, business-first investing in cheap, cash-generative companies with catalysts, restructurings, or operational inflections.

Main Topics: Cedar Creek Partners: Microcap value and expert-market opportunities (Priority: 5/5): Cedar Creek reported strong quarterly and year-to-date performance versus major benchmarks, highlighted very low portfolio valuations, and discussed holdings such as Propel Media, FarmChem, ROYTL, Solitron, and Citizens Bank Shares. The letter emphasizes expert-market inefficiencies and special situations. Laughing Water Capital: Long-duration, change-in-perception investing (Priority: 5/5): The manager defended a strategy of buying businesses with improving earnings power and changing perceptions, arguing that macro uncertainty and short-term market behavior have hurt valuation but not intrinsic value. Examples included Avid Bioservices, Thrive, Hilton Grand Vacations, and Lifecore Biomedical. AltaFox: Countercyclical small caps, credit, and low-risk asymmetry (Priority: 5/5): AltaFox argued that small caps are historically cheap and that opportunities exist both in equities and in under-the-radar credit. It introduced First Cash Holdings and highlighted Aeromexico secured bonds as a lower-risk return opportunity with attractive yield. Macro backdrop and market structure (Priority: 4/5): All letters stress the hostile backdrop for small caps: interest rates, recession fears, geopolitical stress, government deficits, and a market dominated by short-term, quant-driven capital. The managers contend this environment is creating mispricings rather than reducing long-term intrinsic value. Catalysts and operational inflections (Priority: 4/5): The managers focus on concrete catalysts such as acquisitions, strategic reviews, capacity expansions, dividend signals, insider buying, IPOs, and regulatory events that could unlock value over time. Fundraising, talent, and long-term firm building (Priority: 2/5): AltaFox also discussed recruiting, educational programs, and the challenge of building a durable investment platform in a weak fundraising environment for small-cap strategies.

Key Arguments: Cedar Creek argues its microcap portfolio trades at highly attractive valuations and has historically outperformed major indices over the long run, justifying its focus on niche, inefficient markets. Cedar Creek claims expert-market restrictions from SEC Rule 15c2-11 create exploitable dislocations, especially in names like Propel Media and PDRX where buying access is limited. Laughing Water argues stock prices will ultimately follow improving earnings power and perception changes, even if macro uncertainty causes near-term volatility. Laughing Water says businesses like Avid Bioservices and Thrive are simple operational stories, not speculative moonshots, and should be rewarded once capacity or SaaS scale becomes visible. AltaFox argues small caps are deeply out of favor and that valuations across the Russell 2000 are historically compressed, improving forward return potential for patient buyers. AltaFox frames First Cash Holdings as a countercyclical pawn-shop leader benefiting from tighter credit and weakening consumer balance sheets. AltaFox argues Aeromexico secured bonds offer equity-like upside with materially less risk because of strong collateral, post-bankruptcy deleveraging, and IPO/refinancing optionality. Across all letters, managers emphasize patience and stomach for volatility as the key to capturing multi-year compounding.

Data Points: Cedar Creek Q3 return: 12.5% - Net of fees and expenses in Q3 2023 Cedar Creek YTD return: 16.7% - Net of fees and expenses for first nine months of 2023 Cedar Creek annualized return since inception: 14.5% - 17.75-year history, net of fees and expenses Cedar Creek cumulative return since inception: 1006.6% - Net of fees and expenses since January 2006 Portfolio forward earnings multiple: 6.2x - Estimated earnings for the coming year as of end of September 2023 Portfolio earnings net of cash: 5.1x - Expected earnings net of cash at respective businesses Portfolio weighted price-to-book: 1.7x - Cedar Creek holdings as of end of September 2023 Portfolio dividend yield: 1.8% - Cedar Creek holdings as of end of September 2023 Portfolio expected ROE: 27% - Weighted expected return on equity as of September 2023 Cedar Creek cash level start/end: 8% to 5% - Fund cash levels during Q3 2023 Propel Media price move: $0.23 to $1.10 - Quarterly share price increase while FTC review delayed sale to IQVIA Propel Media dividend: $0.01376 per share - Declared during the quarter; nearly 6% of purchase price Propel Media market cap: ~$275 million - Current market capitalization in the letter Potential Propel sale value: $700-$800 million - Believed acquisition value by IQVIA FarmChem ownership after in-kind contribution: 31% - Fund became the largest shareholder after the transaction ROYTL ownership vote turnout: 59% of outstanding units - Special meeting failed to reach the 75% threshold despite 96% approval among votes cast Solitron Microengineering revenue: $5.9 million - 2022 revenue after Solitron closed acquisition of Microengineering Solitron Microengineering operating income: $1.3 million - 2022 operating income Citizens Bank annualized earnings run-rate: ~$7 per share - Estimated annualized run-rate versus $34 share price Laughing Water Q3 return: -11.6% - Approximate decline in Q3 2023 Laughing Water YTD return: 8.3% - Approximate year-to-date return after Q3 Avid Bioservices upside estimate: 200%-400% - Potential multi-year upside if capacity fills and valuation normalizes Avid Bioservices free cash flow estimate: ~$100 million - Expected before long once new capacity is utilized Avid Bioservices enterprise value: ~$700 million - Last quarter-end enterprise value referenced in the letter Thrive SaaS margin improvement: 10 percentage points - Reported jump in SaaS margins Thrive customer acquisition: 40%+ referrals - More than 40% of new customers coming via referral Thrive low-acquisition-cost customers: 80%+ - Referral plus Yellow Pages Zoo customers combined Thrive EBITDA target: $200 million - Intermediate goal for SaaS business HGV free cash flow multiple: ~7x - Valuation after Maui-related weakness and integration of Diamond Resorts Lifecore strategic review timeline: 6-9 months - Banker estimates for an ordinary sale process duration Russell 2000 five-year performance: almost flat - Used to support the case for small-cap value opportunities AltaFox Q3 gross/net return: 6.43% / 5.88% - Q3 2023 fund performance AltaFox average net exposure: 86.43% - Average net exposure during Q3 2023 AltaFox since-inception return: 627% gross / 388% net - Since inception in April 2018 SP 500 since-inception return: 78% - Benchmark comparison cited by AltaFox Russell 2000 since-inception return: 25.63% - Benchmark comparison cited by AltaFox First Cash Holdings shareholder return since IPO: 17.5% per year - Long-term TSR cited by AltaFox First Cash next-twelve-month P/E: <16x - Consensus valuation cited as cheap Aeromexico bond purchase price: $90 - Average cost in July 2023 Aeromexico bond current price: $93.94 - Latest price cited in the letter Aeromexico bond yield: 13.5% / 12.3% - Yield if refinanced one year early and yield to maturity Aeromexico principal reduction: $762.5 million to $662.5 million - Company repurchased bonds ahead of planned U.S. IPO

Pivotal Quotes: "The key organ in investing is the stomach. It's not your brain." — Laughing Water Capital / Peter Lynch quote: Used to argue that long-term investors must tolerate volatility and macro-driven drawdowns "We are not talking about novel business models with unknown capital needs... We're just talking about filling a factory in an industry where demand is larger than supply. We're also talking about operating leverage and cash flow." — Laughing Water Capital: Explains why the manager sees Avid Bioservices and Thrive as simpler, lower-hurdle long-term opportunities "As always, we encourage limited partners to do the same both in times of outperformance and underperformance." — AltaFox Capital: Reinforces the firm’s long-term, intrinsic-value-focused investment philosophy

Implications: The letters suggest today’s market still rewards patience in underfollowed small caps, special situations, and select credit. For listeners, the message is to look through macro noise, focus on cash flows and catalysts, and expect returns to come from valuation mean reversion plus operational improvement.