Crossroads Capital, LLC

When you get a nice signal on your investment process. Recently, Ryan and Daniel, our Founder and Director of Research, were on separate platforms discussing the opportunities in the UK market. In a cheap market in the UK generally, Crossroads has been ahead of the curve, selecting a few high-quality investments that have the capability to compound for decades. Last week, the Financial Times published an article noting that large investment funds are taking note of the opportunities in the UK, below. https://lnkd.in/dHTmgdh3 Please contact us if you'd like to learn more about what we're seeing in the UK and other US adjacent markets.?

In a world of higher interest rates, the cost of debt is higher than in the past, with reason to believe it should stay above the 2009-2019 average. Private?equity transactions require large debt financing, and as such deal flow has slowed down in the last few years. Additionally, higher rates also equate to lower valuations and returns, all things equal.? It should be no surprise?that those in the know agree. Apollo Co-President Scott Kleinman recently said?“I’m here to tell you everything is not going to be ok,” and “The types of PE returns it enjoyed for many years, you know, up to 2022, you’re not going to see that until the pig moves through the python. And that is just the reality of where we are.” Meanwhile, in the public markets, we're seeing some tremendous opportunities with much less competition and liquidity than those in the private markets. https://lnkd.in/ei2W-fNu

Understanding key personnel?within an organization is an important step in our research process. So when someone with a notable background is hired (or fired), we pay attention. The majority of the article below is focused on the departure?of Google's Chief Privacy Officer, but the abrupt firing of the Director of Competition Law (key figure in formulating Google's antitrust strategy) was the one that caught our eye. https://lnkd.in/gA3UeKp2 It seems odd that with a verdict in the Search Trial weeks away, dubbed "The Trial of the Century",?Google would fire its highly accomplished and seasoned antitrust lawyer, who came to the company in 2009 after many years at the FTC. We'll have an update on our Ad Tech antitrust thesis soon enough, but this personnel move may be a leading indicator as to how things are going for Google.?

Sometimes you get a little help from your friends. In our Annual Letter, we highlighted Apple and Tesla as the weakest of Mag7 due to Chinese market competition. Given the fact pattern we are short Apple and its?suppliers. So far so good with iPhone sales down hard in?Asia. And it appears someone?else agrees with?our more negative assessment of Apple's market price. At the annual shareholder meeting in Omaha, it was announced that the venerable?Warren Buffett started to sell down Berkshire's position in Apple. Understandable when you realize Apple was roughly half Berkshire's US public portfolio?last year. The position is now in the low to mid forties and it's no surprise that Berkshire may sell more, as detailed in Barron's below. https://lnkd.in/dRQAuH-a Additionally, Apple received?over $20 billion in pure profit from Google last year to have their search product as the default on iPhones. Almost a?fifth of AAPL's pre-tax income.?This payment scheme may come to an end depending how the judge in the Search trial rules in the coming months. If you are interested in our highly detailed and increasingly prescient antitrust thesis on Google's pending woes please reach out.?

How volatile is the current environment? Reading news headlines can skew your perception of the underlying reality. A recent article by one of our favorite financial writers, Jason Zweig, not only points out how to think about the current market backdrop but also pulls in some mythology references to help frame the discussion. https://lnkd.in/gseHgPAf Not only do we agree with Mr. Zweig, but we applaud the use of time tested myths to convey ideas as we did in our Annual Letter. Despite the news, now is not an exceptionally volatile time. Rest assured, should that change we're poised to pounce on opportunities.?

How do you gauge the level of investor speculation in?a stock? At Crossroads, every investment is scrutinized, not just the business itself, but the nature of the shareholders. Not typically an easy thing to determine. However, sometimes the presence?of short term speculators is blatantly obvious. Take for instance, SuperMicro (SMCI) a company?that builds servers for hyperscalers using Nvidia GPUs. The company's growth has been incredible over the past year, with preannouncements on quarterly revenue. With SMCI's rise, NVDA indicated they would send DELL a portion of the work that SMCI typically does. No one seemed to notice, until SMCI didn't preannounce revenues as they usually do. The result, a ~20% share price decline in one day for SMCI. Meanwhile, the rest of the AI players dropped in sympathy. Barron's noted this phenomenon last week, see below. https://lnkd.in/g7gytXuW That's quite a tremendous drop in price from what amounted to a lack of news, but with expectations so high, clearly there is a lot of speculation in the name. Across the AI trend, we're finding opportunities?both long and short, especially when we see such levels of rampant?speculation in share prices.?

Cracks in the Mag7 already? As we discussed in our Annual Letter, there are a considerable number of pressures on each of the Mag7. The biggest pressure without a doubt are Chinese competitors. The two companies we identified as most vulnerable?in our letter were Apple and Tesla. This Barron's article, linked below, was out just a month ago and both Apple and Tesla share prices have been down since then. This is in part due to continued sales pressures from Xiaomi and Huawei (for Apple) and BYD (for Tesla). https://lnkd.in/gSrNk2Bf For Apple, they recently lost the top spot as a phone maker.? https://lnkd.in/eestkvqw Apple and Tesla make almost 10% of the S&P 500. Some ETFs such as the XLK have ~36% of its holdings in Apple (20%) and its suppliers (16%). That's a big bet for a passive indexing product, which highlights the risks some investors may be unaware of.?

How much bigger can?an elephant?get? A simple question with a complex answer,?and one that is surprisingly?useful for investing. Biology is the study of living organisms, their relation to others, and their consumption of resources available?to them in the environment. The elephants of today evolved from smaller species some 35 million years ago. Ultimately, once they grew beyond the size of their predators, with ample food, they were only limited by their weight. The density of their bones unable to bear any more. What was just said about elephants can just as easily be applied to large companies. At what point do some of these companies encounter a predator their?size, run out of food, or are limited by their own weight? Every company runs into one or all three of these constraints. For Apple?and the other tech companies, the largest predator that has only woken up in the last few years has been the DOJ. Notably, the DOJ has sued several other tech giants, with Apple being the laggard. Successful or not, we ask how much bigger can these elephants get with the?DOJ trying to take a bite? https://lnkd.in/gfXb5jeE

How much is your private credit investment worth? Unfortunately, finding out is not as easy as it sounds. Value in this case is truly in the eye of the beholder, which happens to be the fund manager.?These private loans are hardly ever traded, which gives managers leeway, and their incentive is to keep volatility as low?as possible. From the late February Bloomberg article, some fund?managers are sounding the alarm in the $1.7 trillion market. "In private markets, because no one knows the true valuation, there's a tendency to leak information into prices slowly," says Peter Hecht, managing director at U.S. investment firm AQR Capital Management. "It dampens volatility, giving this false perception of low risk." As the above graphic shows, if you had to sell a private loan, thinking it's valued at par, you may be surprised at the time of sale, realizing it's actually worth 60 cents on the dollar. At some point, private market investors will realize that they haven't avoided risk and volatility, only delayed its impacts in one single moment. In contrast, public markets are constantly changing with new information, and a careful manager can take an investor's funds and use this volatility?to their advantage. Some of us have been doing so successfully for years. https://lnkd.in/gRWZC5tm

Are risk and volatility the same? Most practitioners would tell you risk and volatility are indeed different: one the possibility of permanent loss, the other a measure of how much a stock goes up and down, respectively. ? And yet, when discussing risk management and performance statistics, Sharpe/Sortino ratios that measure return per unit of volatility are seen as a de facto metric for the 'risk' a manager is taking. As such, the entire industry has optimized their strategies to look impressive based on these ratios, inflating them by increasing allocations to private investments, where volatility is intentionally suppressed via little to no mark-to-market adjustments. As to why volatility is used so universally as a proxy for risk, it's simply easy to measure how much a stock goes up and down, the data is widely available and in your face daily. But many of the finance world's biggest blow-ups have occurred by over-optimizing for volatility metrics only to have real risk and real-world operational issues sink their ship. A favorite article from Reuters, now 10 years old, points out this consistent issue in the fund world. ? Here is the link:?https://lnkd.in/gYx-G26m At Crossroads, we deeply understand the actual risk of our investments (including the limits of our knowledge) and use volatility as an opportunity to pick up great companies at a bargain. This understanding and management of risk is certainly more difficult to ascertain from the outside than a simple volatility metric. However, our 8 year track record showing superior downside capture (our investments having a lower drawdown than the indices) makes it much easier to see.?