Q4 2024
Jan 10, 2025
The portfolio outperfomed the benchmark in 2024 delivering returns of 41.40% compared to 23.31% of the S&P 500.
Overall risk, measured by various factors, rose year over year for the portfolio.
New capital was added to the portfolio, and HIMS was the newest addition to holdings.
In 2024, HIMS contributed the largest to returns followed by PYPL and BRK.B respectively. The margin of error can be attributed to the manual calculation of contribution analysis. Since there was a cash inflow into the portfolio and a change in the holdings in the middle of the period, contribution cannot be calculated by multiplying the weights of the holdings by the gain or loss during the period. The proper way to calculate it would be to take a daily contribution of returns and have separate stub periods for each cash inflow or outflow (it is very hard to accurately do this in Excel).
PayPal, Inc. (PYPL) SCORE 3 of 5 FAIR VALUE | $85 MV: $85B
PayPal has continued to be a holding in the portfolio throughout the year, without any additional capital contributions. The company has begun to see some business performance changes since Alex Chriss stepped in as the CEO in the fall of 2023. Revenue grew around 8% for the last twelve months, while earnings grew at around 5%; additionally, the valuation of the company grew larger than the business fundamentals a reflection of increased confidence in management and a larger confidence that the company can achieve profitable growth. Though the business still faces fierce competition, evident in their decreased margins, I believe there are still many opportunities for growth - namely through digital wallet adoption and business payments analytics. Despite fact that the business strategy has largely changed from when I originally purchased shares in 2022, it remains a high conviction investment. I believe the company is fairly valued given its relationship between competitive risks, growth opportunities, and the current multiple that it’s valued at (FWD P/E: 18.5x).
Berkshire Hathaway Inc. (BRK.B) SCORE 3 of 5 FAIR VALUE | $450 MV: $970B
Berkshire Hathaway remains in the portfolio. At face value Berkshire Hathaway looks expensive relative to operating cashflow it provides. The operating earnings of the company trade at a premium to competitors in similar industries (Insurance, Transportation, and Others). The premium is derived from the company’s (and specifically Warrens) ability to invest and achieve attractive returns, while protecting downside risk. For this reason, despite the operating company looking expensive, I believe the company’s ability to deliver investment alpha merits the premium that the operating business is valued at. With all considerations to the business, I believe the shares are fairly valued.
Hims & Hers Health, Inc. (HIMS) SCORE 4 of 5 UNDERVALUE | $24 MV: $5.3B
HIMS is the newest addition to the portfolio this year, and the largest. When I first initiated the position in the spring, I believed the company to be undervalued. The business sells generic drugs in the online consumer packaged goods (CPG) industry. The selling point is its brand and ease of use. The company was (and is) founder lead, possessed a healthy balance sheet, was on the cusp of reaching profitability, and seemed ripe for growth. HIMS was valued at 3.60x LTM sales, with the option to break into the weight loss industry.
Since the initial investment I significantly added to the position; however, during that time the business changed course. HIMS began to offer compounded versions of the weight loss drug “Ozempic” (semaglutide), which overshadowed much of its other businesses segments. Given the legal nature of the compounded drug business and an extremely competitive environment, the forecasted cashflows of the business (and therefore the value of the business) has since been extremely volatile. Although my investment thesis has changed over the period, I still maintain that the business is undervalued at 4.25x LTM sales. Management has showed its agility and ability to seize on opportunities, and I believe they will continue to capture market share while managing the risks that the opportunities impose. Considering the potential growth from the weight loss industry, and despite risks, the business is still valued below its future cashflows.
Over the last year risk, as measured by the standard deviation of daily returns over 2023 and 2024, increased signifigantly. In comparison with the 2023 daily returns, it’s evident that 2024 was a much more volatile year. Though both years had a similar amount of trading days (250 v. 252), on 24 occurences daily returns fluctuated at least more than two stanard deviations. On six occurances, the returns fluctuated greater than three standard deviations, all of which occurred in the fourth quarter.
This volatility was the direct result of my HIMS purchase in combination with its sizable weight realtive to the portfolio. The position also increased realtive to other holdings therefore contirbuting more to the portoflio volatility. The portfolio had substantial daily swings due to news releases directly and indirectly related to HIMS.The goal of the portfolio is to achieve outsized risk adjusted returns relative to the benchmark. Ongoing varation in daily returns has, thus far, not impacted long-term risk adjsuted returns. However, if the portfolio continues to have outsized variability it will likely dramatically reduce the performance on a risk adjusted basis. Over the next year I plan to add more holdings in the portfolio with the contribution of new capital. This will bring down the portfolio’s volatility, as higher risk names such as HIMS will have a compartively lower weight.
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