BlackPearl Masters Fund Newsletter August 2018

In August the fund finished up -0.54% and over the last 12 months is up +10.89%. August is reporting season in Australia when most companies report their earnings.

The fund generally navigated the reporting season well. The stand out strategy for the fund was our long short variable beta Australian strategy which was up close to 7%. In August the strategy benefited from its holding in (PME) Pro Medics, which was up 21% for the month after the company delivered a high-quality earnings report.

Pro Medicus is a leading provider of radiology information systems (RIS), Picture Archiving and Communication Systems (PACS) and advanced visualization solutions. PME’s future continues to look very bright and we expect that the company will continue to win a large share of its US tenders in the enterprise medical imaging space. PME is a high margin business that currently generates 50% EBIT margins. The companies market penetration stands at around 5% which we expect to double in the coming years.

While the company’s future looks strong a core part of the variable beta’s investment strategy is purchasing and owning stocks which trade at a discount to fair value. In PME’s case however the stock now looks fully priced. As a result the strategy took advantage of the higher prices to significantly reduce the position and realise significant profits. Should the share price pull back the strategy will look to take advantage of any mis pricing and opportunistically buy back the position.

Other positions that the fund benefited from included a long position is Appen which was up 43% for the month after the company reported strong FY18 results. Xero was another positive contributor with the stock up 19% in August after the company provided positive commentary and its Annual General meeting outlining the company’s significant growth opportunities and advantages of its expanding global footprint. The fund also benefited from a lower Australian dollar and positions in some of the large tech names such as Apple, CME Group and Amazon.

Reporting season saw many crowded shorts that trade on high PE ratios get squeezed. We have seen a situation where the very high PE stocks have continued to trade higher with the top quartile of expensive stocks delivering double digit returns while the cheapest PE stocks are down 5%.

Valuations look stretched in some growth names with numerous stocks in Australia now trading on 100x plus Price to earnings ratios. Several of the fund’s short positions were up in August despite those companies missing earnings guidance and delivering low quality results. Our managers are of the view that that these positions will present some great opportunities for the fund over the next few months as investors once again start to pay attention to earnings a cashflow.