Palm Valley Capital Fund (PVCMX) Second Quarter 2023 Commentary

Initiated a new stake, citing depressed share price, recession-resilience of auto parts retail, expected balance-sheet improvement as inventories decline and operating margins rise, and valuation based on normalized earnings despite risks such as EV adoption.

“We acquired small stakes in two new names during the quarter: Advance Auto Parts (ticker: AAP) and TrueBlue (ticker: TBI). Advance Auto Parts is an automotive aftermarket parts provider serving professional installers and do-it-yourself customers. Palm Valley briefly owned the stock during the 2020 lockdowns, when the shares quickly reached our valuation. Advance has almost 5,000 U.S. locations. Margins for the business have been inferior to those of O’Reilly and AutoZone, two leading competitors. This is due both to customer mix and operating efficiency.”

Exited the stake because aggressive expansion plans elevated capital expenditures and debt significantly, with anticipated borrowings exceeding the Fund's maximum debt-to-free-cash-flow threshold for cyclical businesses.

“Lastly, we exited our stake in Natural Gas Services (ticker: NGS). The firm’s aggressive expansion plans have elevated capital expenditures and increased debt significantly, and we anticipate borrowings that will exceed our maximum threshold of debt-to-free cash flow for cyclical businesses.”

Fully exited the position as shares approached intrinsic value; risk was elevated by the company's announcement of a new investment in the Hod Maden Gold-Copper Project in Turkey, which increased operational and financial risk.

“We also sold our stake in SSR Mining (ticker: SSRM) as the shares approached our intrinsic value estimate, and the company’s operational and financial risk increased after it announced a new investment in the Hod Maden Gold-Copper Project based in Turkey.”