Newsletter Volume 1, Issue 1

Volume 1, Issue 1: April 17, 2018
Published Privately to Accredited Investors Only Prior to Filing Form D for 506c with Securities And Exchange Commission

Dear Friends:

Mercadyne Fund Management (“Mercadyne Funds” or “Mercadyne”) has now begun publishing a monthly newsletter. It is focused upon micro cap and small cap public equities ($50 million to $2 billion market capitalizations), containing timely investment themes, identification of interesting public companies (companies to watch), observations about industry, group and sector rotation and thoughts and ideas from other fund managers. There are two (2) versions of the newsletter. They are similar except that the Accredited investor version of the newsletter contains additional information about Mercadyne’s private fund offerings. As this is the commencement of our newsletter, for those of our friends whom we know to be accredited, we will also send you the Accredited version of our newsletter. We hope you will find our brief newsletter(s) engaging.

Accredited investor registration click here

Mach 100 LP Investment Performance Results are presented gross and net. Net results are for an investor since inception, net of 1% management fee and 25% performance allocation with a “high watermark” threshold. Individual investor’s performance may vary based on time of investment and class of investment. Since inception returns are from fund inception 4/2018.

See Important Performance Disclosures

THE CASE FOR INVESTING IN SMALL CAP AND MICRO CAP EQUITIES

• Historically (over both a multiyear and multi-decade period), small capitalization and micro-capitalization equities, as defined by the CRSP (Center for Research in Security Prices) decile 10 (bottom 10% of all NYSE, NYSE MKT and NASDAQ securities by market capitalization), have substantially out-performed all other capitalization tiers. Though past performance is no guarantee of future results, such has been the case and we expect it to continue to be the case.

• Non-correlated returns: The preponderance of these companies trade based upon their own fundamentals and the supply-demand situation of the stock, not moving in concert with the broad market indices.

• Minimal or no research (broker-dealer or 3rd party) coverage published on these companies and therefore no recommendations. This creates an opportunity for early investment before these companies are discovered by mainstream Wall Street.

• Larger investment funds commonly cannot invest in these companies because their charters prevent them from doing so (worried about client optics as well as liability) and they don’t understand the risks (while using the excuse that they are just too small).

• Due to lack of sufficient investment community visibility (investor relations activities) and institutional sponsorship, they often trade at lower valuations than their intrinsic values would suggest.

• Once the quality small cap and microcap companies are discovered by Wall Street, there is often a significant “Discovery Premium” and the valuations expand substantially (analogous to a private company going public and the valuation expansion that often accompanies that process).

• Microcap companies are often compelling take-over candidates.

TIMELY AND COMPELLING INVESTMENT THEMES

Aerospace / Defense

The arms race is beginning again; but this time it is in space; and all about satellites, communications and space weapons. The U.S. risks falling behind China and Russia, when it comes to defense and specifically, precision guided weapons systems, communications and space technology. Our Navy and other armed services have vehicles and weapons that in some cases are already technologically behind and militarily inferior to that of these competing Super Powers. Space is the final frontier for defense and communications. Russia and China are ramping up their space-based military capabilities. They already have lasers capable of damaging [destroying] our satellites. The U.S. Department of Defense (DOD) now realizes that our entire way of life is threatened without protecting our satellites and ramping up our space-based defense systems. The DOD has committed to a large budget to increase our space capabilities. While there are the usual large cap companies that will benefit (Boeing, Northrop Grumman, Lockheed Martin and Raytheon), there are some small and microcap companies that participate in the communications, satellite and aerospace defense markets. These companies should be closely studied for investment, as this is a multi-year investment opportunity.

 

Blockchain

Blockchain technology is a timely and compelling investment theme. Defined by Wikipedia: “A blockchain, is a continuously growing list of records, called blocks, which are linked and secured using cryptography.” Blockchain is also distributed, which makes its records more secure and less expensive to maintain. This technology has far reaching applications and can be applied to almost every industry. While companies like Ethereum lead the way for a decentralized platform that runs smart contracts, this technology can be applied to almost every industry. Examples include industries that require massive records management (legal, finance, transaction processing, medical, voting, etc.), security, automotive (fleet management) and manufacturing, to name a few. While the technology is compelling and the applications broad, the companies that will be successful will achieve “application ubiquity” in their industry. These are the companies we seek to identify.

 

GROUP AND SECTOR ROTATION

Strongest Sectors

Group and sector rotation is an important part of a comprehensive investment process, as it is a direct reflection of money flow and therefore demand (in the form of trading volume); and volume is the fuel of price. Currently, we believe the strongest sectors are internet (retail and content groups), software (enterprise, education, data storage and desktop), medical devices, biotechnology, machinery, oil and gas (drilling), transportation (trucking), commercial services (staffing), building products and leisure (lodging). We find the strength in these current sectors particularly interesting in that there is great concern by the media about the economy slowing down. While this may happen in the intermediate term (1+ years), it is not now.

COMPANY TO WATCH: TPI Composites Inc. (NASDAQ: TPIC)

TPI Composites is an Arizona based company that manufactures composite wind blades for the wind energy market. Their blades are utilized for utility-scale wind turbines. The company went public (initial trading) at $11 per share in 2016. The Company became profitable in 2015 (EPS of $.23/share), increased profitability in 2016 (EPS of $.40/share), and is expected further increase its profitability for FY 2017 (Estimate of $1.30 per share). Wall Street earnings estimates for 2018 are significantly below 2017. While this may turn out to be correct (we will learn more during their conference call on March 8), we believe the company is worth watching and studying. The company has high pre-tax margins, suggesting tight operating controls. It has a successful operating model with relatively high net margins and inventory turns. Its revenues and return on assets have grown faster than the median of its peers. In fact, its revenues vs. same quarter previous year have grown 8 quarters in a row. The company does carry substantial debt but continues to be cash flow positive. Insiders own approximately 74% of the company (we like to see high insider ownership). What is remarkable is that over the last 3 years, TPI Composites has generated significant revenues with very meaningful growth and positive earnings with material earnings growth as Feed-In-Tariffs (government subsidies) have been reduced or obviated throughout the global wind energy market. We think TPI Composites is worth watching.

Mercadyne Fund Management LLC is an investment firm founded in 2017. We actively manage capital for our investors. Mercadyne has offices in Las Vegas, Nevada and Portland, Oregon. We employ a research-intensive investment approach which seeks non-correlation to the broad market indices. We utilize fundamental quantitative and qualitative analysis, assessment of securities and broad market behavior, trading psychology and return risk profiling to select investments across asset classes, instrument types, industry sectors and geographies. Our organizational structure decentralizes investment research and analysis and centralizes decision-making and risk management. This approach enables us to avail ourselves of a broad range of ideas and expertise from within the firm, consulting research firms and peers, while ensuring that we possess and maintain portfolio control and comprehensive risk management. We are committed to producing excellence across all functions of our business and seek to deliver superior performance to our investors.

David N. Baker Steve Shum

David N. Baker
Managing Principal
Mercadyne Fund Management LLC
6565 Spencer St., Suite 205
Las Vegas NV 89119
dnb@mercadyne.com
415.297.4749

2018-09-10T19:46:32+00:00