Q1 2025 Performance

The Gulfshore portfolio’s first quarter 2025 returns were 9.5% compared to -4.3% for the S&P 500 Total Return index. While this is a satisfactory result it's worth noting that this performance does not account for any incentive fees that would be typically allocated to a fund manager. To give a more accurate picture of what an investor or limited partner in a private fund would experience, a 15% performance fee should be applied. Note: I do not anticipate using any form of management fee in the official Gulfshore Capital fund, so I haven’t applied one here. The results presented below represent total returns, net of all fees.

With the market in its current mood, it may be worthwhile reiterating the purpose of the portfolio and its strategy. While we use the broader index S&P 500 as a benchmark (dividends included), the portfolio isn’t built around picking stock symbols in hopes of eking out a slightly better performance on a quarter-by-quarter basis. The focus isn’t around evaluating stocks based on short-term movements, but it is based on evaluating businesses that can grow over the long term and grow value per share at above-average rates.

The premise is to invest in businesses that are high quality in nature, have a durable competitive advantage, and from what we estimate have substantial room ahead of them. Since we can’t buy businesses in their entirety (sigh) - our largest holding is currently $80 billion in market value - we use common stock as a way to buy fractional pieces of this business. Stocks are pieces of businesses.

And like we are seeing in times of volatility, stocks tend to jiggle around a bit. But while these stock symbols gyrate, the businesses in which those shares represent continue to grow and improve daily. The idea is that in time, the market will realize an improving business value and assign a higher price to those shares.

Turning to our holdings, the smallest business in the portfolio is around $250 million in market value, and that business did a total of six acquisitions in 2024. Two of the six happened to be in the US marking the company’s first in this market. This is particularly exciting because rough data suggests there could be tens of thousands of potential targets just in the US alone. While not everyone may be willing to sell to this acquirer, even a capture rate of 1 percent of 1 percent would produce a big result.

The business that dragged down the portfolio the most this quarter is one that operates like a digital toll booth. And while I do not anticipate selling any of the businesses already in the portfolio, this is one we’ll keep for the very long haul. The portfolio would likely achieve a higher overall return if we swapped it for another business, or reallocated its capital to an existing position, but I like how it fits into the overall portfolio. There are many reasons to be comfortable with it. It may not end up being our highest performer, but it will provide excess cash in the form of special dividends that can be recycled into other core businesses. The business itself is analogous to See’s Candy of Berkshire Hathaway, in that it earns exceptionally high rates of return on its own capital base (which is very small to begin with) yet doesn’t have enough growth prospects to soak up all the excess cash it produces. So, the only logical thing left to do is to return it to shareholders – through a special dividend. It’s interesting because if you were screening for stocks that offered high dividend yields it wouldn’t appear on any site as it only showcases a modest 1.5% dividend yield. Yet more often than not management issues a special dividend annually which results in a near 5% yield. So not only do you benefit from receiving a substantial dividend well above the amounts paid out by the dividend aristocrats like an Exxon, Coca-Cola, or Procter & Gamble, but you’re also in a business with a wide moat and substantial pricing power—plus the bonus of any potential of future growth opportunities. And what’s remaining is a CEO who owns 33% of the business, and of that, almost half is locked in a trust for his wife and children.

To conclude, it's worth noting that the securities we hold tend to be inherently illiquid, which often makes them more susceptible to heightened volatility. While this can introduce short-term fluctuations, we remain confident that our disciplined, long-term approach allows us to navigate these market dynamics effectively. Our focus remains on identifying and holding quality investments that we believe will generate value over time, regardless of any temporary noise.

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