Dear Friends of GSV,
The GSV X Fund was off by 0.1% in June (net), compared to the S&P 500 dropping 2.1% and the HFRX Equity Hedge Index being off 0.8%. Year-to-date, the GSV X Fund is up 8.1% (net), the S&P 500 is up 0.2% and the HFRX Equity Hedge Index is up 2.4%.
The stock market declined last month, influenced by a swooning Chinese market and a sinking Greek financial system, which will likely be going back to its Drachma currency.
While the Fed essentially gave a status quo messaging, economic data in the U.S. continued to signal a stronger business environment. Builders’ confidence reached a 9-month high with new homes easing just slightly.
Just as analysts were saying the IPO Market had cooled, June was very active with 25 new offerings and with strong aftermarket performance at +24%, on average. Last month’s IPO star was Fitbit which priced above its upward revised range and traded up 50% on its first day. We initiated a 2% position in Fitbit—which makes fitness tracking devices and grew revenue by 209% in Q1. With a positive 27% operating margin and pricing its IPO at 4.2x P/S, Fitbit is one of the most robust IPO companies we have seen in a while. In our fund, FIT shares had the best ROI in June, finishing up 26%.
Chinese growth stocks pulled back, driven by a broader decline in the Chinese stock market. The Shanghai Composite Exchange finished the month down 9%, which also resulted in several of our Chinese longs to finish in the red. Classifieds leader 58.com was down 15%, China’s Tinder, Momo, finished down 11%, and flash sales e-commerce leader Vipshop ended negative 8%.
Our shorts performed in our favor, with 75% of all shorts finishing the month in the red. We added a new short position in Keurig Green Mountain. We believe that Keurig is falling behind and will continue to lose customers and market share against its major competitors—Starbucks and Nestle‘s Nespresso. Nespresso, specifically, has been pushing into the U.S. market lately and is directly competing against Keurig and its K-Cups business. Keurig’s fundamentals are deteriorating, as evidenced by the -22% drop in brewer volume in Q1 and the decelerating growth in K-Cup volume, going from 28% in Q3 last year, to 14% in Q1 this year.
From a macro perspective, the fund’s long portion has a 34% median EPS growth on a forward basis and a median forward P/E of 29x, or a 0.9x P/E to Growth ratio (P/E/G). This compares to the S&P 500’s 5% forward EPS growth rate and 18x forward P/E, or a 3.5x P/E/G. We are focused on keeping the median P/E low and the growth rate up, while investing in the leading growth companies.
We continue to be bullish on the outlook for growth stocks and see the price action of many leaders, such as Facebook for example, to be encouraging. While it’s good to question the rapid rise of any high flying stock, we think the Fitbit IPO example is a really compelling growth case.
We’ve included our June recap for the Fund here. If you would like more information, or are interested in becoming an investor in the Fund, please let us know. Thank you for your continued interest, and for those who are partners, for your confidence. We are working very hard to earn your continued support.
Michael T. Moe, CFA
Chief Investment Officer