One hedge fund that tends to fly under the radar, which should not do, in my opinion, is Punch Card Management.
Run by Norbert Lou, the fund employs the true punchcard mentality. It selects a handful of stocks, and when I say a handful, I mean a handful, and holds them indefinitely.
Lou rarely gives interviews. That is why the fund tends to fly under the radar. The last interview appeared in the November 2011 issue of Santangel's Review.
Beating the market
Punch Card was founded in 2004, and from inception to the end of September 2011, the fund had returned 14.5%, compared to 2.2% annualized for the S&P 500.
The fund manager's strategy is relatively simple, although it does require a lot of patience. Lou owns a portfolio of stocks and sits on his hands. At the end of the second quarter of 2022, the largest position in the portfolio was Berkshire Hathaway Inc. (BRK.A, Financial) (BRK.B, Financial) with a 44% weight.
The second-largest holding was Ally Financial Inc. (ALLY, Financial) with a 36.2% weighting, and the third largest holding was Winnebago Industries Inc. (WGO, Financial) with a 17.4% weighting. The portfolio manager has not sold anything in the portfolio for two years, and Berkshire has been a core holding for decades.
We do not have any investor letters or interview commentary detailing Punch Card's long-term returns, but we can take an educated guess based on the figures we do have available.
As noted above, the fund returned 14.5% from inception to 2011. At the time of the Santangel's interview, it managed $115 million. According to its latest 13F filing, the value of the firm's equity portfolio stood at $322 million at the end of June. This report is not entirely accurate as it only includes U.S. equity securities.
In 2011, Punch Card had historically carried around 25% of its assets in cash, and it has also owned some international securities. On that basis, I estimate that, including a 25% cash allocation, assets under management stand at around $430 million.
Based on the figures presented in 2011, I estimate the fund started life with approximately $45 million in assets, implying that over the past 18 years, it has achieved a compound annual return of 13.4%. That is incredibly impressive considering the 25% cash weighting.
New positions
Considering this return, I think it is worthwhile paying attention to the positions in the portfolio, especially any new holdings that have been added recently. However, as noted above, Lou does not tend to trade that much, though he did enter a new position during the second quarter.
Lou added 524,000 shares of Smith & Wesson Brands Inc. (SWBI, Financial), a position worth just $7 million. That is pretty insignificant compared to the overall assets under management value and the value of the Berkshire position, which stands at around $143 million.
The gun manufacturer has seen its share price slump over the past year, partly due to the fact that sales are expected to decline by around 40% in its current fiscal year compared to fiscal 2021 levels (down around 20% from fiscal 2022).
Sales and earnings jumped in the 2021 financial year, largely due to political reasons that I will not get into here. The market has been repricing the stock ever since, though it now seems to have oversold the equity.
Smith & Wesson is currently trading at just 7.2 times forward earnings, falling to 6 times forward earnings for the 2024 financial year. That is without deducting cash on the balance sheet. At the end of its last financial year, net cash was $82 million.
I do not know exactly why Lou has bought this stock, but based on these metrics, it does look appealing.
