Newsletter Volume 2, Issue 4



Investment Performance January



VOLUME 2, ISSUE 4: April 2019

Dear Friends!
For the month ending April 30, 2019, Mach 100 LP was Up 0.49% Net. This compares to the S&P 500 that was up 3.93% for the month, the NASDAQ Composite which was up 4.74% and the Russell Microcap index which was up 1.91%.

MACH 100 LP INVESTMENT PERFORMANCE SUMMARY

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.

MACH 100 LP INVESTMENT PERFORMANCE COMPARISON

Mach 100 LP Investment Performance Results are presented 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.

EQUITY MARKET OBSERVATIONS

April and May equity markets were divergent. The broad market equity indices moved up in April. They retreated and gave back their gains in May. April markets traded as a “Goldilocks economy.” A Goldilocks economy is one that is not so heated that it causes inflation and not so cold that it causes a recession. Earnings were strong without showing inflation. This is confirmed by equity trading volumes that were consistent with previous April months of trading and 10 year treasury bond yields sitting tight at 2.5%.

May equity markets saw the broad market equity indices down. Gold continued to trade higher, the ten year treasury yield moved down to 2.17%. President Trump, in an effort to curb illegal immigration, announced plans to initiate tariffs against Mexico. This happened almost simultaneously with possible ratification of a new NAFTA agreement. Core inflation seems to now be increasing with personal income, personal spending and the PCE price index (which excludes food and energy) all increasing. Chinese manufacturing has begun to decrease, though only slightly; probably a result of the ongoing U.S./China trade dispute. May showed us a risk-off equity market.

Q1 AND 2019 FOR LARGE CAP, SMALL CAP AND MICROCAP COMPANIES

TAccording to FACTSET: To date, 98% of the companies in the S&P 500 have reported actual results for Q1 2019. In terms of earnings, the percentage of companies reporting actual EPS above estimates (76%) is above the 5-year average. In aggregate, companies are reporting earnings that are 5.3% above the estimates, which is also above the 5-year average. In terms of sales, the percentage of companies (59%) reporting actual sales above estimates is equal to the 5-year average. In aggregate, companies are reporting sales that are 0.4% above estimates, which is below the 5-year average. The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings decline for the first quarter is -0.4% today, which is equal to the earnings decline of -0.4% last week. If -0.4% is the actual decline for the quarter, it will mark the first time the index has reported a year-over-year decline in earnings since Q2 2016 (-3.2%). Six sectors are reporting (or have reported) year-over-year growth in earnings, led by the Health Care sector. Five sectors are reporting (or have reported) a year-over-year decline in earnings, led by the Energy, Information Technology, and Communication Services sectors. The blended revenue growth rate for Q1 2019 is 5.3% today, which is equal to the revenue growth rate of 5.3% last week. If 5.3% is the final growth rate for the quarter, it will tie the mark for the lowest revenue growth rate for the index since Q2 2017 (also 5.3%). Nine of the eleven sectors are reporting (or have reported) year-over-year growth in revenues, led by the Health Care and Communication Services sectors. Two sectors are reporting (or have reported) a year-over-year decline in revenues, led by the Information Technology sector. Looking at future quarters, analysts expect a decline in earnings in the second quarter, slight earnings growth in the third quarter, and single-digit earnings growth in the fourth quarter. The forward 12-month P/E ratio is 15.9, which is below the 5-year average but above the 10-year average.

So what does all of this mean? For large cap companies, earnings growth and sales growth are pointing to a slow down. For small cap and micro cap companies, we don’t see a broad or even general earnings or sales slow down. While the lower the market cap, the more operating results are case-by-case, because smaller companies generally have a niche and are more insulated from the business cycle, we continue to see both sales and earnings growth for both small cap companies ($300 million to $2 billion market capitalizations) and microcap companies ($50 million to $300 million market capitalizations). In fact, we see more opportunities to buy microcap companies at compelling valuations than we have seen since early 2017. We love to see record operating results with low valuations. Therein lies the opportunity.

PORTFOLIO SECTOR ALLOCATIONS

Currently (approximately as of this writing) the Fund has positions (which are always subject to change without notice or obligation), long and short, in the following industry sectors and subsectors: artificial intelligence (energy savings and monitoring for buildings and renewable energy); energy storage (production of lithium ion batteries); fintech (financial technology); leisure gaming (transaction processing for sports betting); media (digital advertising and content distribution); medical device (fertility); social media (platform for parents and grandparents); and pharmacy (online B2B drug distribution, B2C app based on demand prescriptions and deliver and telemedicine).

PORTFOLIO COMPOSITION

We are always learning. It is the process of life and a subset of modern life is investing. In the investment world, there are many criteria critical to a company’s success. Securities research and analysis for Mach 100 LP is not only quantitative but qualitative. For us, the single most important fundamental criteria, for consideration of a security in our portfolio composition is a qualitative factor. The management team and board. To quote others before me “it’s the jockey not the horse.” Behind every ticker symbol on a screen are real human beings running the company, determining its success. Businesses can “pivot” 180 degrees, the company can develop new products, terminate old business models and create new ones, the company can go public, merge or integrate an acquisition. No matter what, the one constant that determines which companies succeed and those which fail, is management and its board. At Mach 100 LP we quest to understand which companies’ board and management are likely to succeed and which are likely to fail or at least never create significant shareholder value. Phenomenon to avoid: Management teams and/or boards that have never succeeded before; questionable backgrounds (legal, regulatory, etc.); arrogance (arrogance often gets people broke in America and in other countries gets them killed or exiled); related party transactions, companies who report late with their filings (reflects lack of organization and discipline); complicated capital structures (shows company’s inability to run business judiciously and make prudent decisions about financings); consternation between board and management (a recipe for destruction), constant inconsistencies in the company’s filings, investor presentations and messaging; unwillingness to communicate with the “Street;” excessive salaries as defined by correlation to operating results and market capitalization; and an unwillingness to listen to and at least consider investor perspectives, suggestions and desires.

While great or at least good management teams and boards are the opposite of the aforementioned, here are a few additional positive characteristics worth mentioning: Leadership that has credibility with Wall Street. Think financial conservatism. Under-promising and over delivering; Command of the company’s operating results and detailed knowledge of its financials and ability to explain the drivers of the business; Expertise to provide some level of guidance to investors to understand where the business is going, not just quantitatively but qualitatively; The ability to either make forward looking statements that are relatively accurate, or at least explain that the industry does not lend itself to visibility and the reasons for such (e.g. raw materials and manufacturing suppliers); hiring executive management and board that are as good or better than the incumbents. Surrounding one’s self with people smarter and more capable than you, only makes you better; Creating a corporate culture of freedom of ideas, collaboration and appreciation; ability to delegate and empower (the board empowering its executive management and executive management empowering the entire staff of the company).

Possessing a deep understanding of the management team and board positions us for both high conviction long positions and short positions. Finally, we are activists to micro-cap companies in a supportive role to the management team and board and not creating undue publicity. We choose not to spend years at a time being adverse to management teams and boards. Adverse activism may be noble but can take years and has proven as a broad portfolio management strategy, except in isolated cases, to create low annual investment returns. So our activism, with select portfolio companies, is supportive and requires that we truly understand the management team and board. If/as/when we determine a negative change in the behavior of the management team or identify an unfit management team, we exit the long position or initiate a short position.

FUND DESCRIPTION

Mach 100 LP is a non-correlated, activist, small and micro-capitalization ($50 MM-$2 B) long/short, equity focused fund, possessing concentrated positions and capitalizing on discovery premium and information arbitrage. The Fund utilizes fundamental quantitative and qualitative analysis, technical analysis, assessment of securities and broad market behavior, trading psychology and return risk profiling to determine security selection and portfolio exposure across asset classes, instrument types, industry sectors and geographies. The Fund’s objective is to generate absolute returns with lower correlations than typical equity market benchmarks. Mach 100 LP often takes an activist role with our small cap and microcap portfolio companies. This is a positive, supportive role; not an adverse one, with no desire for a change in control and without undue publicity. Our activism is generally in four main areas: Capital structure; Financing; Investment Community Visibility; and Business development. These are the areas where small cap and microcap companies need the most assistance and support. We work closely supporting the CEO, executive management and board to effect major positive change, specifically to create more shareholder value in a shorter period of time and to maximize long term shareholder value; more so than if we were merely passive. We have deep and broad experience with structured transactions and have been investing in them successfully for the last 25 years, since our first fund, DNB Fund Partners LP, in 1994. Advantages vary by instrument purchased and include: Significantly enhanced returns; Principal protection (until call, conversion or maturity); Creditors preference (until call, conversion or maturity); reduced volatility; ability to earn a positive return in low-yield or flat equity environments; and tax efficient access to fully taxable investments.

DISCLAIMER


Mercadyne Funds, LP (“Mercadyne”) is not currently registered in any capacity in the financial services industry, and the information that
accompanies this disclosure, as well as any other information provided by Mercadyne, should not to be construed as financial advice, investment
advice or a solicitation to buy, sell or hold any particular security. Mercadyne makes no warranty, expressed or implied, as to the accuracy or
completeness or fitness for a purpose (investment or otherwise), of the information provided in its publications, including its websites and social
media posts, including video, audio or text. The published information has been sourced from publicly available sources, but Mercadyne does
not guarantee the accuracy, timeliness, completeness or correct sequencing of the information, and does not warrant any results from use of the
information. Readers are encouraged to consult their personal financial adviser before making any decisions to buy, sell or hold any securities
mentioned in any materials from Mercadyne. Investing in securities of emerging growth companies or emerging growth economies is highly
speculative and carries an extremely high degree of risk. It is possible that all of an investor’s invested capital may be lost or impaired due to the
speculative nature of the companies profiled. In addition, Mercadyne’s personnel and/or investment vehicles may have or take long or short
investment positions in the companies discussed in the accompanying information (the existence of any such positions will be disclosed when
applicable). Mercadyne encourages readers to invest carefully and to read the investor information available at the websites of the Securities and
Exchange Commission (“SEC”) at www.sec.gov and/or the Financial Industry Regulatory Authority, Inc. (“FINRA”) at www.finra.org/investors.
Mercadyne is not responsible for any error, mistake or shortcoming that may be occasioned at the time of publishing of the information in this
publication, any other Mercadyne publication, or its web site(s) and is not obligated to, and undertakes no duty to, update and/or correct any
information. No liability is accepted by Mercadyne for any direct, indirect or consequential loss arising from the use of the information that
accompanies this disclosure. Mercadyne expressly disclaims any fiduciary responsibility or liability for any consequences, financial or otherwise
arising from any reliance placed on the information provided. The information that accompanies this disclosure is subject to change without
notice. While the accompanying information may include details relating to Mach 100, LP (the “Fund”), a private investment fund managed by
Mercadyne that relies to SEC Rule 506(c) to maintain a “private placement” of its securities, an offer of such securities may be made only by the
delivery of the Fund’s Confidential Private Placement Memorandum specifically addressed (either on the cover page or in an electronic mail
message) to the intended recipient.

By |2019-06-19T15:39:43+00:00June 19th, 2019|Unaccredited Newsletters|0 Comments