Q4'24 CGC Quarterly Letter
Performance, positions, and commentary
Disclaimer: All information provided herein by Cedar Grove Capital Management, LLC (“Cedar Grove Capital”) is for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security.
Portfolio Performance
In Q4 2024, Cedar Grove Capital (“CGC”) returned 21.0% compared to 2.5% for the S&P 500 and 0.3% for the Russell 2000 and ended the year with a return of 38.5%.
Brief Portfolio Commentary
We've been very pleased with the results for our first year (starting Q2) under the new multi-strategy mandate. As a reminder, our strategy consists of holding core long positions in small-cap and below names that we believe have tremendous upside but might need a few years to unlock their full value.
While we wait for those core longs to “work,” we implement positions in various special situations that allow us to capture alpha in shorter time frames. These situations range anywhere from M&A arbitrage to event-driven trades like we had with Red Cat Holdings (RCAT) and Sleep Number (SNBR).
We also take highly selective short positions in names we believe are either fundamentally flawed or the market is overestimating near-term estimates/hype. However, given the backdrop of 2024, we felt it very dangerous to actively short names in a volatile market.
Having a multi-strategy approach allows us to reduce overall beta exposure while being paid to “wait” while our core longs start to work. This is the strategy that helped us navigate the broader market decline starting the week of 12/16 as we’ve shown below.
Our insurance contracts on both the SPY and QQQ, combined with targeted protection on HIMS, allowed the PnL to rise by 126bps that week vs the SPY and IWM declines of -184bps and -450bps, respectively.
While our well-timed insurance contracts worked in our favor, we still have concerns for 2025, especially Trump’s first 100 days, which is why we’ve raised cash to strategically allocate to new opportunities in the new year.
We’ll discuss our current positions and positioning further below, but first, we want to highlight our recent HIMS trade and the lessons we learned from it.
Hims & Hers Health (HIMS) Trade Reversal
The point of a hedge fund is to quite literally hedge the portfolio (shocking). When done right, it can be a great strategy to boost returns and reduce the impact of drawdowns as they occur.
While our recent hedge had a great outcome, investing is a constant learning journey, and we recently had a learning lesson with HIMS. This wasn’t a learning lesson because we were wrong (we weren’t) but because our view, or lack thereof, of an irrational market, affected our timing.
Below is our shared takeaway. Throughout this year, we’ve been very vocal about HIMS, mainly because it’s our second-largest holding and also because the long-term potential of cash-pay telehealth is immense. The name has done quite well for us, and if you’ve been a paid investor in our research, you know how frequently we update our research and commentary as news headlines come out that could materially alter the long thesis.
The most recent can be found below.
Going into Q3’24 earnings (the day before the U.S. election on November 5th), we had put on a PUT/CALL option strategy that would protect our core position if the stock sold off (like in Q2’24) but also paid us out if our deep, OTM covered calls did not reach their exercise price.
The trade seemed to be working well as our PUT positions added a few bps to the PnL after Amazon announced their foray into the exact space that HIMS operates in and earnings were on par with expectations shared the week prior from BofA.
However, what we did not anticipate was the extreme post-election Trump rally, a delay in the November FDA decision on whether Tirzepatide would come off the shortage list (+12% on the day), and the face-ripping rally when Martin Makary was picked to head the FDA (+24% on the day).
As an investor in this name, we are very close to this business and the risks associated with this investment. Much of the news that moves this name positively is largely noise and hot air, which we’ve been very vocal about on Twitter so I won’t bore you about it here.
Long story short, we felt very confident that Tirzepatide would remain off shortage (which we shared with you all prior to), the “hot air” with the Makary news was not as good as everyone thought, and the stock should come back down once reality set in.
Unfortunately, given the nature of the original strategy we implemented, the call options effectively capped our upside past a certain point (which was already >25% above the price the day of earnings) which is why we did not see much volatility in our PnL through November and December on this name.
The trade effectively was “working against us” going into December as our deep OTM covered calls were now deep ITM and could be called at any time despite us knowing we weren’t wrong in our analysis. We deliberated various strategies amongst ourselves that could potentially limit our losses or have us come out ahead.
The solution we ended up executing was to get out of our covered calls with as little of a loss as we could but size up in new cheap PUT positions with duration to extend our runway. These PUT contracts were “cheap” given IV and the unlikelihood that it would happen.
As we predicted, HIMS price came down from the ~$35/share hard and fast given the quick and fast drop in the name leading up to and the day of the FDA decision on December 19th (that Tirzepatide would stay off shortage), which allowed us to limit our covered call losses and capitalize on the implied volatility.
All in all, we ended up not losing any money on the option strategy and in fact, came out with a 5% overall gain toward the PnL which conveniently offset losses elsewhere during the week of 12/16 (FED meeting).
While from a technical standpoint, we did net out here, there was an opportunity cost associated with this trade. Had we had the ability to sell our HIMS shares in the ~$35 area, we would have done so in a heartbeat. Those prices were euphoric given the impending news of Tirzepatide and what will be the eventual news of Semaglutide.
However, we had to work with what we had in front of us, and given the circumstances, we’re proud of the outcome and our ability to strategically come out ahead.
Option timing and quickly exiting if an irrational market takes place are the learnings here for us which we’ll be taking with us going forward. Should the opportunity present itself in the near future to above $30/share, we’ll most likely make a move in that direction. Until then, we’re still holding. Still long, and have taken on protection on this position.
General Commentary
Q4’24 showed us all just how crazy things can get, and then some. Anything AI, quantum, or drone-related skyrocketing just from being a part of that thematic space. Crypto coins like fartcoin, Moo-deng, and PNUT (that stupid squirrel coin) just proved that the market isn’t tight at all and degenerates are still gambling away with meme stocks/coins.
You have CEOs like Michael Saylor from Microstrategy (MSTR) openly buying Bitcoin to put on his company’s balance sheet to return some made-up metric called “bitcoin yield” which is eerily similar to what Celsius CEO Alex Mashinsky was highlighting during his argument with Peter Schiff before they went under.
It’s honestly so fascinating to watch this unfold in real-time considering that we literally just went through this about, 2 years ago. Deja vu doesn’t take that long to repeat itself it seems but we’ll see if the outcome ends up the same (>18% drawdown).
It almost seems that way when making money this year appeared almost too easy. It’s also never a good sign when you see everyone sharing screenshots of their YTD gains touting companies that are trading at >50x NTM sales or claiming things are the next 100x after already being up 10x.
We think much of the engine that was driving momentum stocks this year will face a challenging 2025. If you read our 7 Themes of 2025 that we’re monitoring, ~40% of the S&P is made up of just 10 stocks which is quite alarming given the concentration risk.
For instance, Apple (AAPL) might become the first $4 trillion stock but on an LTM basis over the last 8 quarters, their revenue has stayed within a range of $381 billion and $391 billion. It hasn’t been able to break out of that range so far but earnings growth is a mere 9.5% and passive flows continue to bid up the multiple to >35x FY’25 EPS.
That doesn’t make sense to us but it seems that the Mag 7 names have just become too big to fail and with so much inflows going into the U.S. markets, it’s hard for managers to deploy that level of capital into names other than big boys with durable, below-the-line growth. A defensive play that brings into question where the “incremental gain” will come from after an >37% rally in 2024.
However, when it comes to what we’re thinking about for 2025, we think it’s not going to be a smooth ride. With a new regime coming in that has promised a lot to their voters, too much is unknown and we think it’s naive to think it’s all sunshine and rainbows for the economy and thus, the stock market.
While we largely think Trump tariffs are a bluff to use at the negotiation table, we don’t believe that Trump's tax and spending cuts are. Trump is an egotistical man and is very public about linking the success of a presidential candidate to how high the stock market has risen during their tenure. Given that this is his last term (sans trying to repeal the 22nd amendment, unlikely), we think he wants to leave behind a legacy that juices the stock market further so he can point to it and say, “See, I did that. Things were that good under me.”
Considering all that he’s promised, it’s hard to assume that the broader market benefits from not just uncertainty, but also radical change. We won’t dive deeper into that since we’ve covered many of the topics in that aforementioned theme post for 2025 but it all leads to a bumpy ride.
A potential rise in inflation means the FED either pauses instead of cuts or perhaps has to pull a fast one and raise rates (also unlikely). Implenting said tariffs on our allies means potentially retaliatory tariffs come into play or perhaps the EU ends up falling into a recession with both Germany and France leading the charge which concerns U.S. investors that America might follow suit. Drastic changes to the labor force by rounding up illegals could constrain labor in areas that are already contributing to much of the inflation we’ve seen thus far (wages) which won’t be easily replaced.
In regards to a FED response to such policies, Barron’s put out a great piece on the uncertainty around Trump policies, how the FED is going to refinance short-dated rates over the next year or so, and how they might have to dip into the piggybank to keep things afloat which doesn’t end well.
While we would never bet against the U.S. economy, going into the new year with so much uncertainty, we’ll be more selective with our long positioning and size up more weight into special situations and both overall portfolio and single stock protection to reduce beta exposure.
Positions Quarter-End + Commentary
