3Q24 Small-Cap Fund Commentary
Southeastern Asset Management is a Memphis-based deep-value firm founded in 1975 by O. Mason Hawkins to exploit the bargains left by the 1973-74 bear market. Its flagship Longleaf Partners Funds (launched 1987) invest employees' own money alongside clients'. Following Graham's discipline and its "Business, People, Price" framework, it runs concentrated books of 15-25 undervalued stocks held for the long term — famously closing funds to new investors when opportunities were scarce. CEO and Head of Research Ross Glotzbach now leads the firm, which publishes quarterly Longleaf fund commentaries and Research Perspectives notes.
In plain words
This is a quarterly update from Southeastern's small-cap fund. It explains how their stocks performed (some like Oscar Health did well, Westrock Coffee struggled) and why they adjusted positions. They highlight upcoming events—like spin-offs or buyout rumors—that could boost stock prices. For regular investors, it shows how pros hunt for undervalued small companies and manage risk. Worth reading because the examples are concrete, but don't copy blindly; small stocks are risky.
Southeastern (Longleaf Partners) Q3 2024 Report The Small-Cap Fund posted a quarterly return of 8.92%, outperforming the Russell 3000 (6.23%) but slightly trailing the Russell 2000 (9.27%). Year-to-date, the fund returned 11.45%; 1-year return stood at 23.55%, 3-year at 3.28%, 5-year at 6.47%, 10-ye
Theme and Background
This section is the opening introduction of Southeastern (Longleaf Partners) 2024 third-quarter report, primarily summarizing the Small-Cap Fund's performance during the quarter, portfolio adjustment dynamics, and recent progress on value realization events for several holdings. The report also announces the retirement of Vice Chairman Staley Cates at year-end.
Core Thesis
The author's core investment thesis is: Multiple holdings in the portfolio have clear potential for near-term value realization, and these opportunities are undervalued by the market. The counterintuitive judgment is that, despite the fund underperforming the Russell 2000 Index during the quarter, the author believes the portfolio's differentiated allocation (highly distinct from the index) and multiple value catalysts (such as spin-offs, acquisition rumors, and simplification restructuring) will drive future returns.
Key Arguments and Data
Fund P/V ratio at a low 70%, cash position at 10.5%, and 19 holdings
- Performance Comparison: The fund returned 8.92% for the quarter, outperforming the Russell 3000 (6.23%) but slightly underperforming the Russell 2000 (9.27%). Year-to-date return is 11.45%, 1-year 23.55%, 3-year 3.28%, 5-year 6.47%, 10-year 6.01%, and annualized since inception in 1989 at 9.87%.
- Portfolio Adjustments: Cash levels fell to single digits (below 10.5%) early in the quarter due to adding to several positions; by quarter-end, some strong performers were reduced or exited.
- Value Realization Events:
- Howard Hughes Holdings (HHH) completed the spin-off of Seaport Entertainment, and its largest shareholder, Pershing Square, filed a 13D, considering strategic alternatives.
- Mattel and Boston Beer were recently reported in the media as potential acquisition targets.
- Liberty Media accelerated simplification efforts, benefiting Liberty Live Group and Atlanta Braves Holdings.
- Cash and Valuation: Cash position at 10.5%, 19 holdings, P/V ratio in the low 70% range.
Contribution Data (Table):
Small-Cap Fund returned 8.92% in Q3, 11.45% year-to-date, and 9.87% annualized since inception; the Russell 2000 returned 9.27%, 11.17%, and 9.28% over the same periods
| Company Name | Quarterly Return (%) | Contribution to Total Portfolio Return (%) | Portfolio Weight (%) |
|---|---|---|---|
| Oscar Health | 34 | 1.93 | 5.9 |
| CNX Resources | 34 | 1.91 | 6.6 |
| Anywhere Real Estate | 53 | 1.46 | 2.4 |
| Graham Holdings | 18 | 1.07 | 6.4 |
| Dole | 34 | 0.98 | 3.9 |
| Westrock Coffee | -36 | -2.36 | 4.2 |
| White Mountains | -7 | -0.35 | 4.3 |
| Boston Beer | -5 | -0.23 | 4.1 |
| Park Hotels & Resorts | -4 | -0.22 | 4.5 |
| Hyatt | 0 | 0.00 | 2.5 |
Companies/Assets Involved
Oscar Health and CNX Resources, each with a 34% total return, were the largest contributors in Q3, while Westrock Coffee, with a -36% return, was the biggest detractor
- Oscar Health (Bullish): Largest contributor for the quarter (1.93%), achieving over 40% growth and better-than-expected margins, moving toward a 5% operating margin target. The author believes it has hidden non-earning assets (different regions at various ramp-up stages) with significant long-term growth potential. Short-term volatility may arise from election news, but the author has used the volatility to add and reduce positions.
- CNX Resources (Bullish): Contributed 1.91% for the quarter, with solid operations and continuously growing per-share value. Its low-cost structure and hedging strategy allow it to generate free cash flow (FCF) in various price environments, used for share buybacks.
- Anywhere Real Estate (Bullish): Contributed 1.46% for the quarter, boosted by expectations of Federal Reserve rate cuts. Even in the current sluggish market, it remains FCF-positive and is expected to generate substantial FCF under normalized conditions. The author reduced the position after strong performance but remains confident in the CEO.
- Westrock Coffee (Bearish/Cautious): The largest detractor for the quarter (-2.36%), with results falling short of expectations and full-year guidance lowered to the initial range's lower end. The main focus is on the completion of the new Arkansas plant, expected to start generating FCF next year. The market is in a "wait-and-see" mode, with technical selling pressure.
- Howard Hughes Holdings (Bullish): After the spin-off, Pershing Square is considering strategic alternatives, which could trigger a value revaluation.
- Mattel, Boston Beer (Bullish): Rumored as acquisition targets, potentially bringing a premium.
- Liberty Media (Bullish): Simplification efforts are accelerating, benefiting Liberty Live Group and Atlanta Braves Holdings.
Investment Implications
- Focus on Value Catalyst Events: Investors should closely monitor assets in the portfolio with clear paths to value realization, such as spin-offs (HHH), acquisition rumors (Mattel, Boston Beer), and simplification restructuring (Liberty Media), as these events may unlock value in the near term.
- Leverage Volatility for Trading: For stocks like Oscar Health, which are volatile due to macro or political events, the author suggests using volatility to add or reduce positions rather than holding passively.
- Patience for Capacity Ramp-Up: For companies like Westrock Coffee, which are in a capacity ramp-up phase, investors need patience for FCF improvement after the new plant becomes operational. Current market sentiment is negative, but long-term value may be undervalued.
- Monitor Management Changes: The retirement of Vice Chairman Staley Cates may lead to slight adjustments in investment strategy, but the author does not mention negative impacts, implying strong team stability.