The Leatherback Long/Short Alternative Yield ETF (LBAY) (the “Fund”) net asset value (NAV) declined by 3.07% in April, compared to a decline of 4.08% for the S&P 500 Index. LBAY paid our forty-first consecutive monthly distribution, at $0.076 per share in April. This is a 2.08% SEC yield versus the S&P 500 Index dividend yield of approximately 1.42%, and the 10-Year US Treasury yield of 4.681%. Year to date as of April 30, 2024, NAV for the Fund advanced 1.68%, compared to an advance of 6.04% for the S&P 500 Index. NAV performance for the Fund to date since inception (November 16, 2020) has produced a 45.50% cumulative total return and a 11.48% annualized total return.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Performance current to the most recent month-end can be obtained by calling (833) 417-0090. The gross expense ratio for the fund is 1.24%.
View LBAY standardized performance here.
The Fund’s NAV is the sum of all its assets less any liabilities, divided by the number of shares outstanding. The market price is the most recent price at which the Fund was traded.
ARTIFICIALLY STRONG 2024 PAUSES IN APRIL*
After soaring by 10.55% on a total return basis during the first quarter, the S&P 500 Index1 declined by 4.08% in April, leaving the S&P up 6.04% year to date through April. Despite the pause, the year 2024 overall has produced robust performance across most asset classes with speculative fervor in artificial generative intelligence stocks, cryptocurrencies and technology stocks leading the advance. In our opinion, market confidence could be fragile and weekly (daily) sentiment surrounding the artificial intelligence (AI) theme has driven volatility in equity markets. We witnessed this sentiment indicated by daily single stock moves approaching 10% in $1 to $2 trillion market cap stocks such as NVIDIA Corporation (NVDA), Meta Platforms, Inc. (META), and Alphabet Inc. (GOOG) during the month of April. As long-term investors, we are cognizant manias typically coincide with real secular disruptions, and we believe AI will bring enormous productivity to many industries. Yet, we believe the overall market is frothy and recent economic data may put a wrinkle in investor confidence in the near and medium term.
Specifically, recent inflation readings have been firmer than anticipated, shifting the view on the prospective for rate cuts to later in 2024. Additionally, US GDP grew by just 1.6% during the first quarter, which was weaker than economists projected. As April concludes will investors “sell in May and go away” or will the momentum resume?
RAINDROPS IN THE INFLATION DATA
Investors hoping for interest rate cuts in the first half of 2024 may be disappointed as recent inflation readings appear stickier than expected. Inflation data has been firm, with March year-over-year Consumer Price Index (CPI) rising by 3.5%, February by 3.2% and January up 3.1%3.
“I always say, one month is no months, but three months—that’s at least one real month, now that we’re seeing—after six, seven months of very strong improvement and close-to-2% inflation—something that’s well above that, we have to recalibrate, and we have to wait and see.”4 - Austan Goolsbee, Chicago Fed President
As economic growth continues to weaken, we question whether investors may shift their focus toward the staggering amount of total US Federal debt outstanding. To end 2023, this number exceeded $34 trillion5! The US debt to GDP ratio is shown below and has remained at elevated levels since spiking during the pandemic6.
Over the past several years we have written quite a lot about growth, spending, and the interest rates and debt levels that have been required to support it. We find the numbers increasingly difficult to ignore and think market participants who have fueled the stock market rally need to decide if the momentum will continue from here. In our opinion, the market has rallied too far and too fast, and we believe shifts in consumer spending are just getting underway.
“We're clearly seeing consumer behavior shifts. Our data shows we're essentially back to our normal pre-COVID mix across all income groups. But specifically, your question for the third quarter, transactions from households with incomes above $150,000 were higher than last year. Transactions from incomes below $75,000 were much lower than last year, and at every brand, transactions fell from incomes below $50,000. Similar to Q2, this shift was most pronounced in our Fine Dining segment.”7 – Rick Cardenas, CEO of Darden
“Our U.S. company-operated business posted a 3% comparable store sales decline in Q2, driven by a 7% decrease in transactions. Consistent with Q1, the traffic decline was pronounced among more occasional customers, with a more cautious consumer environment as a backdrop.”8 – Rachel Ruggeri, CFO Starbucks
The US Consumer is considered the driver of the US economy, as consumption comprises around 70% of GDP. However, market sentiment as of late has been precisely focused on the AI theme. While there is quite a strong bull case for AI stocks, we are finding values abound across multiple names, and wonder if a handful of companies can continue to drive equity markets higher if the consumer continues to struggle.
Interestingly, at the Berkshire Hathaway annual meeting on May 4th, Warren Buffett had the following to say of the current market valuation.
“I don’t think anybody sitting at this table has any idea of how to use it [$182B+ in cash] effectively, and therefore we don’t use it. We don’t use it now at 5.4%, but we wouldn’t use it if it was at 1%...We only swing at pitches we like… things aren’t attractive…I don’t mind at all under current conditions building the cash position. When I look at what’s available in equity markets and the composition of what’s going on in the world, we find it quite attractive.”9 - Warren Buffett, May 4, 2024
PORTFOLIO REVIEW10
We presently maintain long positions in 3M Company(MMM) and its newly spun-off healthcare business Solventum Corporation (SOLV). SOLV’s market capitalization is currently $11B and its legacy health related businesses have existed for over 70 years generating over $8.2B annually in sales through wound care products, IV management solutions, dental products, filtration technologies and health information systems10. The spin-off was completed on April 1st, and as shareholders of MMM we received 1 share of SOLV for every 4 shares of MMM owned. As is typical with newly spun stocks, SOLV sold off immediately after the spin. As a result, we added to our position and expect to be longer-term investors in the name. We are attracted to SOLV’s robust operating margins of 25% and its free cash flow** generation potential as the company has produced over $1.4B in free cash flow in each of the last three years. Central to our investment case is our belief that the company will quickly reduce its relatively high debt load of $8B11 utilizing its cash flow generated over the short to medium term. Finally, SOLV is led by Bryan Hanson, who left the CEO position of $24B market cap Zimmer Biomet Holdings, Inc. (ZBH). Hanson was also an executive of Covidien, which was a spinoff from Tyco that was ultimately sold to Medtronic, PLC (MDT).
Next, we continue to maintain a long position in Newmont Corporation (NEM), the $47B market cap precious metals miner that stands to benefit from higher gold prices. NEM completed its acquisition of Newcrest Mining Limited in November of 2023 creating one of the world’s leading gold companies. Interestingly, spot gold prices have risen from $2,000 per ounce to over $2,300 per ounce since December 2023, yet NEM stock has muddled along. We think the stock price weakness is temporary and NEM, which is also the only gold producer in the S&P 500 Index, is a bargain at today’s levels. Additionally, we are attracted to NEM’s 2.4% current dividend yield.
On the short side of the book, we continue to be skeptical of high valuation consumer names. Recently, we added Dick’s Sporting Goods, Inc. (DKS), a $16B market cap retailer that markets and sells sports equipment, apparel and footwear. At the time of this writing, DKS stock price has risen nearly 40% year to date and more than 45% over the trailing year after delivering robust sales performance. Notably, DKS has been a key beneficiary of the Stanley branded cups and drinkware which is prominently sold at DKS stores.
View LBAY top 10 holdings here. Holdings are subject to change. Characteristics and metrics of the companies shown are for the underlying securities in the fund’s portfolio and do not represent or predict the performance of the fund. There is no guarantee that a company will pay or continually increase its dividend.
FINAL THOUGHTS
We hope our investor partners enjoy our monthly perspectives. We are finding many compelling ideas both long and short and we look forward to continuing our dialogue in the weeks and months ahead.
