Golden Door Asset Management 2016 Annual Letter

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Includes: BWLD, HQY, QHC, UHAL
by: ValueWalk

By VW Staff

Dear Partner:

We have reached a fulcrum point, better known as the tipping point. This upcoming year is abundant with change. Ranging from politics and wages to regulations and investing, we should only expect the unexpected. Many of these changes can be difficult to anticipate; you cannot hedge against it. The word of the year is uncertainty. Anyone you ask is uncertain of what the future beholds. Fortunately for us, this is not new. In times of uncertainty, as your investment managers, it is our job to predict and capitalize on change.

Over the past few months, you may have noticed that market pessimism has been dying down. The primary reason is reporters are running out of negative news and do not know how to properly value good growth stories. Hindsight can be easy to report, but leaders are more focused on foresight. With that said, let us begin our letter covering 2016 and then transition into our thoughts for 2017.

Golden Door Asset Management - Quarterly performance

In 2016, we delivered a 14.08% return, while maintaining roughly 44% of our portfolio in cash. We successfully met our objective to deliver the best risk-adjusted returns for investors. Given the true political uncertainty that was witnessed, we are very happy with these results.

Below is a summary of a few of Golden Door's investment picks for 2016:

Quorum Health Corporation (NYSE:QHC) - This was a roller coaster stock which eventually became the best-performing small cap stock since the election. Immediately after Trump won the election, this stock nearly doubled going into year end from our ~$5 cost basis. As the company nears our intrinsic valuation, we will begin monetizing our gains.

Quorum was a spin-off of Community Health Systems (NYSE:CYH), which we wrote about in May 2016. Healthcare was the worst-performing sector last year, mostly because Hillary Clinton was anticipated to become president of the United States. Many investors shied away from the industry, giving us an opportunity to buy a distressed asset for 30 cents on the dollar. This was our contrarian mindset at work.

The market capitalization for the company went as low as $130 million and well below an institutional investor's threshold. Their disadvantage was our advantage. After reading numerous company filings and attending conference calls, we uncovered that the company had a solid plan to sell off unprofitable hospitals and focus more on its core cash-flowing business. Our thesis was simple: after a successful sale of its first hospital, the company's balance sheet would strengthen, making it an attractive investment for many other small-cap investors.

HealthEquity (NASDAQ:HQY) - Another post-election winner. Health savings accounts are extremely underrated in the marketplace today. It is an excellent product that can save consumers money over the short and long term. Institutional banks simply do not have the resources to compete with HealthEquity. With Trump planning to reverse Obamacare, we can anticipate this company having accelerated growth in the upcoming years.

Amerco (NASDAQ:UHAL) - Classic low-value stock with a lot of room to grow. Better known as U-Haul, this company is a well-known American brand. Real estate is becoming bullish, translating into more moving across the country. We are suspect Amerco's equity will also greatly benefit from the Trump tax cuts in the future.

Buffalo Wild Wings (NASDAQ:BWLD) - A fellow activist pushes for the win. This is a personal favorite, and we recommend every reader to try the wings this spring season. Marcato Capital, an offspring from Pershing Square Capital, is heavily invested in this company and on track to control the board. Fantastic product, and a truly unique offering in the marketplace.

It should be noted that we appraise our performance based on the underlying businesses we own, not the stock's short-term performance. As value investors, we believe the intrinsic value of a business and its stock price will eventually converge. With that said, it is important to review our performance on a five-year basis. The reason being, we are long-term investors. In exchange, we have long-term partners investing alongside us.

You will never see us abandon our proven investment strategy to simply outperform the index in the short run. Our strategy has always been to concentrate on a few stock investments with the objective of delivering a higher absolute return over time with less market risk than a diversified portfolio. This has been successful strategy for many wealth builders in the past.

Macroeconomics

Recent economic numbers are showing signs of strength. With our focus on domestic companies, we are fortunate the U.S. is still considered a highly rated economy. The biggest unknown we face today is our new president and how he will manage the country.

President Donald Trump was inaugurated on January 21st, 2017, and has been very active in his first 30 days. From the immigration ban to repealing the Affordable Care Act, the newly appointed President has created an upheaval across the country, for many good reasons. The good news is many top-tier executives have supported or endorsed President Trump post the election. These businessmen include Warren Buffett, Rex Tillerson, Wilbur Ross, Carl Icahn and Peter Thiel.

Politics and technology can be destabilizing forces, leading to good or bad disruption. Challenging the status quo is how this country was built. Today, we are re-entering an unregulated environment, ripe with opportunities. While it may seem chaotic, America and its people will come out stronger from this.

Rising interest rates will create a stock picker's environment. A rising tide will lift all boats. With increasing rates, inflation will come back simultaneously. Companies will begin having pricing power, and wages will rise in tandem. This is a positive note for the American consumer. Higher wages and low energy prices will result in more consumer spending across the nation. Also, with Trump's initiative to bring back jobs to the U.S. and increase infrastructure spending, certain areas of the country will start to revitalize.

The repeal of the Affordable Care Act may not help every consumer, but it will help small businesses. Health insurance premiums and employee-related penalties are stagnant. The net profit margins for small and midsize businesses should increase, giving them more room to spend on cash flow assets. Certainly, a positive boost for the economy overall.

We have found that exercising patience will prove worthwhile in the long run. The reason we have a high cash position is because we have not found enough opportunities to allocate capital behind. Valuations are too high in many industries for us to meet the minimum internal rate of return we expect from each investment. During a growing market, there is always a fear of missing out on the next big investment. As stewards of your capital, we are diligently looking to allocate funds into the most valuable investment opportunities. While we cannot promise returns for 2017 given the uncertainty, we can assure that management's net worth is directly aligned with our investors. We feel the same investment pain points you do.

Finding Value in Growth

At Golden Door, we are constantly on the hunt for new investment opportunities, and are open to ideas from our fellow partners. Below is our simple, yet concise, list of investment criteria that we use to evaluate stocks:

Our objective is to discover undervalued companies that will deliver long-term value for our portfolio and invest in these companies with timely execution. As other investors look for "new" opportunities, we plan to stick with a proven strategy: invest in high free cash flow assets. In 2017, we have continued screening for low-priced value stocks with the ability to organically grow cash flows. Higher future cash flows result in a higher intrinsic value. Our simple formula for success.

Operational updates

Entering our fourth year of business, we are more than excited to start the year strong. We are happy to say that we passed the mid-seven figure mark for total assets under management in 2016. Although important to our business, our primary objective is not to gather assets, but deliver high-quality, sustainable returns. We believe a return-focused objective is the best option for us and our partners.

In 2016, we made many new friends and new investors. For individuals hesitant to invest, 2017 is the start of a secular growth market. Rates are rising, and more opportunities are opening every day. Sitting on the sidelines is no longer a viable strategy. Our most significant update this past quarter has been ramping up our investments and refining our strategy.

We look forward to building a valuable investment portfolio and relationship with you. We are here to cater directly to your investment needs, so please do not hesitate to reach us at any time. Our focus as always will be on long-term value creation. If you or anyone you know shares that vision, we welcome you as a Golden partner.

Best Regards,

Golden Door Asset Management

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