The Fund’s holdings posted generally strong returns across the board over the quarter.
The strongest performance came from Ryanair, the European budget airline. The collapse of Thomas Cook (the UK based tour operator and airline) in late September will lead to a more rational market and more favourable future operating conditions. This is expected to benefit the remaining European budget airlines, including Ryanair, which we believe is the strongest operator in the region. And despite the setbacks from ongoing delays of its Boeing 737 Max deliveries, we are of the view that Ryanair will maintain its leading position. We progressively accumulated our position from June to September. Ryanair returned 38.6% for the quarter (up almost 50% from our purchase price), and had grown to be a 4.7% position by the end of the year. Although no longer the compelling opportunity it was 6 months ago, we do not view it as over-priced at these levels.
Thor Industries, which the Fund has owned virtually from inception, returned 32.7% over the quarter. It hosted an investor day that was favourably received and it reported solid quarterly results. Most notably, dealer inventories are subsiding to normalised levels, and its European acquisition is performing as expected. Whilst all this is undoubtedly positive, the strong run in its share price now has Thor trading at almost a 20% premium to our conservative valuation.
Both Thor’s CEO and Ryanair’s CEO have significant stakes in their respective companies, and both increased them over the quarter. Thor’s CEO bought more shares during the quarter. Ryanair’s CEO didn’t – probably because he would have been competing with Ryanair itself as it was actively buying its shares.
Business at Dick’s Sporting is progressing well. It reported impressive third quarter same store sales growth of 6% and upgraded its full year guidance (which at mid-point would represent 13.5% earnings per share growth). After returning 22.0% over the quarter, its business is now priced at an earnings yield of around 8.8% and in-line with our estimated value.
Turning to Japan, T-Gaia, the telecommunications reseller was up 21.8% and Tosoh, the chemicals producer returned 18.7%. Together these holdings represent only around 5% of the Fund but contributed over 1.0% to its quarterly return.
Moving to the troubled automobile sector. On October 25 the United Auto Workers union (UAW) ended its strike at General Motors US plants. This was the longest automobile strike for 50 years, stopping production at more than 30 plants and costing original equipment manufacturers (OEMs) millions each day. So, the 48,000 workers returning and the revival of production was undoubtedly a huge positive for our investee companies in this sector. Our long-held conviction position, Lear, was up 17.1%. Also, we benefited from our two new positions as explained below.
We started buying Linamar (discussed in the next section) in the last few days of September only to see it tumble over 10% on 3 October when it provided an update on market conditions (including a CAD1m per day earnings hit from the then current UAW strike). We considered these to be largely temporary in nature, so we took advantage of the opportunity to increase our position at a more favourable price than we had paid initially. Linamar closed the quarter 17.5% higher than our average cost.
We also accumulated a 2% position (too small in hindsight) in Methode Electronics in late October. Methode is a global manufacturer of a diverse range of electronic devices, interfaces and lighting systems principally catering to the automotive industry (but increasingly to other industries). In December it announced second quarter results. In contrast to Linamar, this time a favourable price reaction was unfortunate as we were yet to complete our buying.
Despite the strong share price gains, we still view Linamar and Methode as attractively priced.
The only detractors of note were L Brands and Franklin. L Brands (down 7.5%) has been the worst investment for the Fund to date, and it is discussed in the next section. Franklin, the investment manager, was down 10% over the quarter (although it did pay a dividend). Despite it being a small position (around 2%), that hurts! Franklin announced its full year results, and the appointment of a new CEO. The results were not particularly encouraging, and we are certainly not enamoured with this company. Do not be surprised if our loss from this investment is realized shortly.