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CCM 4Q 2017 Performance And Investment Update

Summary

3Q 2017 Portfolio Performance.

Performance Attribution.

Portfolio Statistics.

Select Investment Commentary.

Dear partners, friends, and fellow investment professionals – 

In the fourth quarter of 2017, Clarendon Capital Management returned 0.9% after brokerage expenses and the stated management fee.

Summary Return Statistics for CCM Composite

Time Weighted Return

4Q 2017

2017

Annualized Since Inception (1/1/2012)

CCM Return (gross)

1.2%

7.5%

14.2%

CCM Return (net)

0.9%

6.4%

12.6%

IVV Return (price)

6.8%

21.8%

15.8%

Over/(Under) Net Performance

(5.9%)

(15.3%)

(3.3%)

IVE Return (price)

6.5%

15.3%

14.6%

IVV (iShares Core S&P 500 ETF) is our primary benchmark, and IVE (iShares S&P 500 Value ETF) is a proxy for large-cap value investing.  Value investing underperformed the broader S&P500 index in 2017 by 6.5%.  For large-cap growth stocks, the FANG group was a large driver of IVV’s outperformance.  FANG 2017 returns were the following, Facebook 53%, Amazon 56%, Netflix 55%, and Alphabet/Google 33%.  I recognize the incredible franchises these businesses have and think Amazon and Google have great business models, but I have not been able to become comfortable with the high multiples these businesses receive from the market. CCM’s strategy had gains in every quarter, but relative to the IVV benchmark, it was CCM’s worst performing year.  This year was about reinvention and change to pay more attention to small/micro-cap companies and short-selling.  Over the long-term, a low PE portfolio and small-cap factor have shown outperformance.  Patience will be required until this happens again.

4Q 2017 Performance Attribution

I am including a table detailing the performance of positions that contributed positively or negatively by more than 0.5% (including dividends). Unless an investment has been disclosed publicly, I will describe it without the company name. I am also highlighting the performance of special situations and short-selling, which can include individual investments identified in the table.

Positive Contributors

Negative Contributors

Up-listed special situation

2.0%

Midwest Community Bank

(4.2%)

Seagate (STX)

1.5%

HCIT Micro-cap

(0.7%)

Berkshire Hathaway (BRK.B)

0.8%

Net App (NTAP)

0.8%

Special Situations

1.4%

Short-Selling

0.4%

Commentary on Portfolio Changes

CCM entered 2017 with 20 positions.  Of those 20, 12 remained at the end of the year.  CCM made 16 new investments, including only one that was entered into and existed during the year.  This was the largest number of investments I have made in a single year and the highest turnover.  Please note, this was only positions and not by weighting.  The weighting method would be significantly lower because the five largest positions were in the portfolio all year.

The biggest portfolio change was the increase in short-selling investments with two new positions in Q4 and a portfolio weighting of 11.1%.  I was also pleased that the special situations category also reached 15.1%.  The weighting in financials went down as a result of the large community bank position declining and the appreciation in technology.

On valuation, CCM’s core strategy had a weighted LTM PE of 14.2x versus 23.7x for IVV at year-end.  Other statistics for CCM’s portfolio include trailing operating margins of 10.4%, ROE of 11.9%, and a Beta of 0.45 – not that I put emphasis on Beta.  However, it is an indication of how the portfolio will perform in this strong up trending market.

Quarter over Quarter Summary Statistics Comparison

12/31/16

9/30/17

12/31/17

No. of Positions

20

24

27

% in top 5

62.0%

61.9%

59.3%

Industry Weight

Financial Services

54.7%

55.4%

51.3%

Technology

17.7%

16.2%

19.7%

Materials

6.7%

6.0%

6.1%

Industrials

5.0%

4.0%

5.9%

Healthcare

4.6%

3.0%

3.5%

Other

4.0%

3.6%

5.0%

Short

0.0%

(2.4%)

(11.1%)

Cash

17.2%

14.1%

19.5%

Additions (end val)

1 (1.7%)

4 (6.5%)

Increases (beg val)

5 (5.8%)

2 (2.4%)

Eliminations (beg val)

4 (8.2%)

1 (0.9%)

Special Situations (end val) 1

5 (9.5%)

8 (11.5%)

8 (15.1%)

Market Cap 1

Large

30.0%

25.3%

28.4%

Mid

21.5%

19.1%

17.3%

Small

41.3%

43.9%

45.8%

Footnotes:

1. Does not include short positions.

Select Investments

The Midwest community bank performance was the clear detractor.  It is CCM’s largest position.

The good – At year-end, the price to book value was 1.2x which is attractive relative to the XLF (iShares financial services sector ETF) multiple of 1.4x.  Midwest community bank also has a PE ratio of 16.7x and its EBT margin is an enviable 24.1%.

ROE for the nine months ended September 30, 2017, was 7.4%, an indication that there is room for greater leverage and operational improvement.  The bank has nearly 30% Tier 1 capital to risk-weighted assets.  Non-performing assets continue to trend downwards over the last year.

I continue to see the bank as an attractive takeover target with a strong mortgage banking division and its conservative capitalization.

The bad – I disagree with a major capital allocation decision the Board made in 2017, but I understand how many shareholders, particularly the retail base, would view the decision favorably. I believe the bank has growth opportunities and could be more aggressive with initiatives given its conservative capitalization.

The automobile industry has become of keen interest and attention in the second half of 2017 with four holdings in the sector – two manufacturers and two dealerships.  Net, these four positions are (8.4%) of the year-end portfolio value.

I again acquired shares in the micro-cap HCIT investment, approximately doubling the number of shares held.

I published an analysis of Herbalife (NYSE: HLF), on Seeking Alpha.  CCM is short Herbalife and believes that financial performance will become the focus again.  Herbalife recently issued poor guidance.  With its tender offer completed and settlements reached with regulators, I think it will become apparent that HLF is not meeting its cost of capital.

Last week I shared my first regular weekly blog. It will be a collection of observations on interesting things from the week as well as commentary on investment holdings and investments researched. The posts will be linked via Twitter and published on Medium and Seeking Alpha.

Thank you for reading.  Best wishes,

Carlos P. Sava, CPA, CFA

Founder and Portfolio Manager

www.Twitter.com/ClarendonCapMgt

www.Medium.com/@ClarendonCapMgt

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This message is not a recommendation, solicitation, or offer of any security. Investments are inherently risky and appropriate caution and diligence should be taken. Please conduct appropriate due diligence and consult a financial professional, attorney, CPA, and/or similar professional before making any investment decisions. Investment decisions should be made after careful review of your financial situation, risk tolerance, investment objectives, and time horizon.
Past performance is no guarantee of future results. Individual account performance may differ. Investment advisory services are described and provided upon completion of an investment advisory contract. Please refer to Clarendon Capital Management’s Form ADV 2 for additional information.
Information contained herein is from sources believed to be reliable, but we cannot guarantee its accuracy. CCM return results are the time-weighted return for the applicable period. Performance is shown after management fees and expenses. CCM performance and return results contained herein are unaudited.