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December 2017

Value Investing is Dead

A famous hedge fund manager with a strong performance record spanning well over a decade questioned the efficacy of utilizing his “value” approach to investing. The companies with new, disruptive technologies sport valuations that are a mystery to him. Most importantly, the performance of those companies in the stock market crushed value stocks. This famous investor notes that it seems the market is irrationally valuing growth and momentum. In his opinion, the market is overvaluing market share gains driven by the disruptive nature of the new companies rather than the prospects for free cash flows of the new companies. Old valuation tools aren’t working. This respected manager is confident conditions will turn, but seems beaten down by waiting and confesses he has no idea when the turn might occur.

If our literary trick worked, you are assuming we are referring to the comments of Greenlight Capital’s David Einhorn in his recent partner letter.   We are not. The letter cited above reflects the thoughts of Julian Robertson as expressed in his final letter to partners dated March 30, 2000.   While conditions are quite different today than at the peak of the NASDAQ bubble in March of 2000, the similarities are noteworthy, including the anecdote above. Conditions could be ripe for a meaningful recovery in the relative performance of value styles.

At Azarias, we invest utilizing the same decision making process regardless of which styles are in favor.   In fact, the Azarias Focused Small Cap Value strategy has outperformed the Russell 2000 by 9.8% net of fees annualized since inception (November 1, 2015) despite our value-oriented style.  We attribute those strong results to our expertise in identifying turnaround opportunities near fundamental inflection points and our concentration of the portfolio in those 15 to 20 best ideas that meet our strict criteria for return potential and risk control.  Please review the attached overview of our strategy and contact us with any questions.

The return reported above is the Focused Small Cap Value Composite (net of fees) and includes cash, cash equivalents and the reinvestment of any income. The return of the index includes the investment of dividends but does not account for transaction costs and operating expenses, which an investor might incur in attempting to obtain such returns. If an index had expenses, its performance would be lower. You cannot invest directly in this index. The returns are as of the date(s) indicated and is subject to change. The performance data quoted represents past performance. Past performance is no guarantee of future result.

©Copyright 2017, Azarias Capital Management LP