Insanity is doing the same thing over again and expecting different results. So goes the misattributed Albert Einstein quote. And so goes our Q4 2024 Investing letter.
The stock market is a giant laboratory to observe this sort of repetitive behavior. Investors collectively and individually repeat one another’s errors. We learn the wrong lessons, and fight the last war. We copy the wrong success story. Human behavior is eternal, leading to the same sorts of results, over and over.
Part of the challenge is that unlike a clinical laboratory, the stock market offers countless uncontrolled variables. It’s hard to truly know whether we’re doing the same thing each time, because the environment changes. Interpreting results and whether we are truly ‘right’ or ‘wrong’ takes more work.
2024 was a bull market year, with mega technological companies leading the way. We could describe most years since I started investing in 2011 that way. Some details have changed. Last decade’s FAANG is this decade’s Magnificent Seven. 2010’s cloud computing begets 2020’s artificial intelligence. Artificially low interest rates of old become ‘actually we can handle medium interest rates’ of today. But that has been the ‘super theme’ since the financial crisis.
Anything can happen in 2025, whether a continuation of this trend or the divergence, like 2022. Waiting for a sudden ‘change in market regime’ may be hopeless; preparing for various environments may be prudent.
Not every year will be as placid as the waters in this photo.
Going With and/or Fighting the Flow
Middle Coast Investing concluded our first full year as an independent advisory business. Among our process achievements, we welcomed new clients, dealt with the transition from TDAmeritrade to Charles Schwab for most clients, and learned important lessons about both portfolio management and analysis, lessons I hope not to have to re-learn.
Our stocks finished the year with a strong Q4, as we outperformed the S&P 500 and the Russell 2000 for the quarter. In 2024 as a whole, we beat the Russell 2000, our most relevant benchmark, but trailed the S&P 500, the most important benchmark. There is some variance among our portfolios. Those that did better tended to have large-cap tech stocks. Our core portfolios (with significantly less large-cap tech) still beat the Russell 2000, however.
Our goal is to beat the market over the longer-term, and to protect and grow your capital. It would be easy for me explain the S&P 500’s performance by saying that the market this year just didn’t favor our investing style. That the continued climb of those big tech stocks is irrational. That it will correct at some point. I could point to the rare years when big tech sells off as proof that it pays to not follow the crowd.
But that would fulfill the above definition of insanity. Large technological companies have favorable characteristics that lead them to win. We’re not totally missing out from this super theme, and not just in the one portfolio with large Amazon (AMZN) and Apple (AAPL) positions, or portfolios with Broadcom (AVGO) and Taiwan Semiconductor (TSM). Booking Holdings (BKNG) and Progressive Insurance (PGR) are stocks we own across the board and big winners that fit the general profile of fully valued but better than their peers’ players.
There will be another 2022 type bear market at some point. The magnificent 7 returned an average of -46% that year, and SPYV (a value fund) beat SPYG (a growth fund) by nearly 2300 basis points. We can hope to outperform when that year comes.
But over a five-year span, 2022 is just a blip. The winners more than make up for that when you throw in the other years.
We enter 2025 excited to improve on 2024 and to prepare for any sort of market condition. The market is a fluid, changing environment. We’ll try to do the same things that worked in past years, while adapting for today. It’s the best we can do to stay sane.
Thank you to my clients to date for your support and trust. I’ll be doing everything I can to reward that trust, including learning new lessons and applying old ones. I’m excited for 2025, and to see what we can do in today’s market, and the market in the years ahead.
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What follows is my Q4 2024 Investing Letter. I have already published a market preview for 2025, as well as a review of my biggest hits and misses in 2024. The rest of the letter focuses on new positions I added or positions I closed in our accounts.
2024 and Q4 2024 Performance
| Q4 2024 | 2024 | 2023 | 2022 | 2021 | 2020 | |
| U.S. portfolios | 5.1% | 15.1% | 47.0% | -13.4% | 16.8% | 12.0% |
| S&P 500 | 2.1% | 23.3% | 24.2% | -19.4% | 26.9% | 16.3% |
| Core U.S. portfolios | 3.2% | 11.2% | 47.0% | -13.4% | 16.8% | 12.0% |
| Russell 2000 | 0.0% | 10.0% | 15.1% | -21.6% | 13.7% | 18.4% |
| S&P 600 | -1.0% | 6.8% | 13.9% | -17.4% | 25.3% | 9.6% |
| Nasdaq | 6.2% | 28.6% | 43.4% | -33.1% | 21.4% | 43.6% |
| European Portfolios | -0.5% | 10.9% | 13.4% | -15.3% | 4.5% | 18.3% |
| Euro Stoxx 50 | 0.0% | 8.3% | 20% | -11.7% | 21.0% | 3.5% |
| DAX | 9.2% | 18.8% | 19.2% | -12.3% | 15.8% | -6.3% |
Disclaimers and notes:
- See performance disclosures for more details on performance.
- These results are net of fees and include reinvested dividends or the cash received1.
- Core portfolios exclude a portfolio with huge Amazon and Apple positions. Our total portfolios exclude a portfolio we stopped managing in October and another we started managing in December. The new portfolio will be included in starting Q1 2025.
- All calculations are done by me and subject to error.
Portfolio stats
- Our portfolio level price to earnings for trailing 12 months (TTM) was 20.9. Our price to free cash flow TTM ratio was 19. This compares to 19.7 P/E and 16.9 P/FCF at end of Q3.
- Cash and equivalents (the ETFs MINT, JPST, SGOV, and BIL, the money market fund SNOXX, and short-term U.S. T-bills) was 15.3% of our quarter end portfolio, with an estimated average yield of 3.1%. This compares to 17.1% of our portfolio and 3% yield at the end of Q3.
- We bought 4% more equity positions than we sold in Q4.
Our top 12 positions as of January 1, 2025:
- Amazon – 13.5% of our portfolio
- Apple – 12.5%
- Progressive – 4.7%
- Discover Financial (DFS) – 3.8%
- Grupo Aeroportuario del Centro Norte (OMAB) – 3.7%
- Lululemon Athletics (LULU) – 2.9%
- Broadcom– 2.9%
- First Citizens National Bank (FCNCA) – 2.7%
- Axcelis (ACLS) – 2.6%
- Aercap (AER) – 2.2%
- Astronics (ATRO) – 2.2%
- Steelcase (SCS) – 2%
Q4 Winners / Losers
| Winners | % Gain | Losers | % Loss |
| AMZN | 2.1% | ACLS | -1.3% |
| AAPL | 0.9% | ATRO | -0.3% |
| LULU | 0.9% | Portillo’s (PTLO) | -0.3% |
| AVGO | 0.9% | PGR | -0.3% |
| DFS | 0.8% | SCS | -0.2% |
| Dallas News (DALN) | 0.5% | Archer Daniels-Midland (ADM) | -0.2% |
2024 Winners / Losers
| Winners | % Gain | Losers | % Loss |
| AMZN | 4.8% | Atkore (ATKR) | -2.3% |
| AAPL | 3.3% | ACLS | -2.2% |
| AVGO | 2.0% | EventBrite (EB) | -1.2% |
| PGR | 1.6% | DBX | -0.3% |
| DFS | 1.6% | OMAB | -0.3% |
| FCNCA | 1.0% | PTLO | -0.3% |
| TSM | 1.0% | ATRO | -0.3% |
| BKNG | 0.8% | F&G Life & Annuities (FG) | -0.2% |
New Stocks
Q4 was a very busy quarter. The election clarified some of what’s to come, and increased probabilities for certain events. We adjusted our portfolios more than I might normally in a quarter. I suspect there are more active quarters to come, though.
Portillo’s
I wrote up Portillo’s briefly in Q3, where I had executed a pair trade with Kura Sushi (KRUS), buying Portillo’s shares and selling Kura Sushi short. That trade worked on a short-term basis, and while I unsuccessfully shorted Kura again (see below), I also decided to open a Portillo’s position.
Portillo’s is a Chicago-based restaurant chain known for its hot dogs and Italian beef sandwiches. The restaurants are not as standardized as your typical fast-food chain, and they are bigger. Portillo’s is beloved in Chicago, and I’ve come across Portillo’s fandom by chance several times since starting to research the stock2.
The problems with the company are all in that paragraph. It is beloved in Chicago, but the greater Chicagoland’s population is not growing, capping Portillo’s opportunity. Its restaurants are larger and harder to run than a typical, easily franchise-able restaurant.
Those are not secrets. The management team is focused on building restaurants in the Sun Belt, with a focus on Arizona and Texas, to find new growth. It boasts impressive sales on a per restaurant basis, including in these markets. Portillo’s has also developed the ‘restaurant of the future’, a smaller, cheaper-to-build version of Portillo’s that, in the company’s tests, sells just as much food.
The stock has performed poorly in 2024 and since coming public in 2021. It is still 19% owned by a private equity firm looking to dump its shares over time. Its same store sales have been negative in 2024, which is not a great sign of customer demand. And I believe two additional kicks sent it further down to finish the year: the nomination of Robert F. Kennedy Jr. as Department of Health and Human Services Secretary, which is believed to be a threat to ‘unhealthy’ foods of all types; and year-end tax-loss selling.
I don’t think Kennedy, even if confirmed, will have a direct effect on consumer fast-food demand3. The private equity position should no longer be a major factor. And the same store sales may be due to lack of growth in Chicago and what Portillo’s management calls the honeymoon effect, where sales start out so strong at new stores that it skews comparable performance until the restaurant gets to year 3.
Portillo’s balance sheet is good. Its free cash flow is positive even as it invests in building 10+ new restaurants a year. It is profitable even at this early stage. And the average unit volume of sales at each restaurant is especially impressive. I don’t think this is going to be a giant national chain. But I think there’s room for it to grow, and its valuation is not giving much weight to that growth opportunity.
TripAdvisor (TRIP)
Travel is my favorite sector to study, and has paid off for us over the years. TripAdvisor always seemed like a value trap to me. An old-world web company, a Web 2.0 model from a more open era. The business is reliant on user generated reviews of hotels and restaurants and travel destinations. TripAdvisor then funnels readers of those reviews to the hotel sites or online travel agencies like Booking.com to book hotels. It is a middleman, dependent on Google’s algorithms and winning against very tough competition. TripAdvisor is useful as a site, but seemed stuck as a business.
It also has owned Viator, an online travel agency for finding tours, since 2014. Viator has been what has seduced investors for a long time. It has been faster growing, is a leader in its sector, and is focused on ‘experiences’ – tours, activities, events –one of the last sectors of travel to truly go online. GetYourGuide, a top but likely smaller competitor, earned a $2B valuation in 2023. (TripAdvisor also owns The Fork, a restaurant reservation service, which is a fine, tiny business relative to the main story).
In Q3 2024, Viator finally passed the legacy TripAdvisor in revenue. It is less profitable, in part because TripAdvisor is ‘investing for growth’. There is a parallel to Portillo’s: Portillo’s cash cow Chicago restaurants fund the company’s growth in other markets; TripAdvisor’s cash cow legacy business funds Viator’s growth. The race between Viator’s growth and legacy TripAdvisor’s decline now seems winnable. And if it’s won, TripAdvisor shares will be worth a lot more.
On top of this, TripAdvisor was in negotiations for a sale earlier in 2024. That sale did not come through. But it’s a sign of interest in the market. On top of that, TripAdvisor is buying out Liberty TripAdvisor, a major shareholder in the business, at a reasonable price. The thesis still hinges on whether Viator can outrace legacy TripAdvisor, but several obstacles have been removed from the racetrack.
Crown Holdings, Ingram Micro, Levi-Strauss
I’ve been interested in ‘boring’ companies that should do well whatever the market environment, and that have strong balance sheets in case things turn badly. ABM Inc. (ABM) from last quarter, Steelcase, or J.M. Smucker (SJM) are examples of these types of companies. SJM has more debt on its balance sheet, but I believe its business will be stable enough for it to pay off the debt, creating more value for shareholders.
Crown Holdings (CCK) is an aluminum can maker, primarily, and fits in this category. Its balance sheet also has more debt than I’d like, but the business appears stable and likely to grow. Aluminum cans are more recyclable than glass or plastic, which may fuel share gains. Many investors I respect view Ball Inc (BALL), Crown’s larger competitor, as a better run company and better way to play aluminum cans. Crown appears to be growing volume more in 2024 than Ball, however. I have just a starter position in this stock while I learn more about the dynamics between the two companies and the industry as a whole.
Ingram Micro (INGM) is a technology distributor of both hardware software. It is the biggest competitor in size to TD Synnex (SNX), which we also own. Ingram just went public again after being bought out and then resold a few years ago. It has the baggage of private equity ownership, which will put pressure on shares in the coming years. The company’s revenue has not been growing, though I think that’s an industry level issue. It has scale and is a leader in the industry, and trades meaningfully cheaper than its peers. We again have a starter position, but I don’t think that discount should persist (and in owning SNX, we believe there is value in the sector as a whole).
I’ve owned Levi-Strauss (LEVI) briefly before, and am trying again after a year where its stock nearly doubled from where I bought it, before dropping 30%. This is a small position based on the company’s improving cash flow and balance sheet, and the ubiquity of the brand. But it’s also to some degree just a better alternative to cash for one account.
Lastly among stocks, I bought shares in MDU Resources (MDU), a utility company in the Dakotas. I don’t like the utility sector. But MDU spun off Everus Construction Group (ECG), an electric grid construction company, which is a better business. We sold our shares in MDU immediately after the spinoff. We held our small position in ECG through the end of the quarter, though we sold it in the first full week of January.
In one account where we own mostly bonds, a few bonds were called. We reinvested those proceeds in CLOZ and JBBB, collateralized loan obligation ETFs that yield more than most bonds. I don’t plan for these to be long-term positions. In two accounts, we also bought TBF, a short 20+ Year Treasury ETF, as a hedge in case bond yields go up (what I view as the big economic risk for the incoming administration).
Closed positions
We sold all our shares of Arlo Technologies (ARLO) after owning them for nearly 4 years. The latest quarter itself wasn’t terrible, but the valuation is asking a lot at this point. The company has not achieved GAAP profitability and spends a lot on share-based compensation. While the company has a good balance sheet and there is reason to expect it to grow its service business, that business is slowing and I’m not seeing signs of a ‘big hit’ that would justify the price of shares. We earned an acceptable return, though given the volatility and risk level, it was probably not outperforming.
After the election, we bought more shares in Matterport (MTTR), a pure merger arbitrage play. I viewed it as 90% likely a Biden/Harris led administration would ok CSGP’s purchase of MTTR, and that probability improved with Trump’s win. But the deal is 50% shares of CSGP, and CSGP’s shares have gone down (and still do not represent good value in my view). We sold all of our position in mid-December, when the spread between the merger consideration and the stock price was just over 6%. Not enough to compensate for the slim chance that the deal falls apart and MTTR’s shares get cut in half.
I mentioned KRUS above. We closed our short the second time around at $90, shortly after the company’s Q3 which I thought was quite bad but didn’t really hit the stock. There’s no obvious catalyst to correct the company’s value, and I am probably missing the bull case. I only short in personal accounts.
We also sold shares of JNJ, MRK, UNP, XOM, WMT, and AMGN from the portfolio we took over that had a lot of classic dividend stocks. We are more or less managing that like a core portfolio now, with a bit of a dividend focus.
Interested in more from Middle Coast Investing? Or in talking to us? Get in touch.
Please read our full performance disclosures.
Disclosure: I am long all bolded companies mentioned in this letter. I may change positions at any time. I have no immediate plans to make major changes. This is not investment advice. Investing is risky. Any investing decisions are your own responsibility and should be taken after speaking with an advisor or at your own risk. This is not a solicitation to buy or sell anything. Past performance is of course no promise of future results.
Disclaimer: I calculate performance and all portfolio figures manually, so it may be prone to error. The accounts I manage may deposit or withdraw money over the course of a quarter. I account for that in my calculations by adding/subtracting that money to/from the starting amount at the beginning of the period. This means withdrawals intensify performance and deposits dampen it. For half-year, 9-month, and full-year performance, I multiply quarterly performance by one another to control for deposits/withdrawals.
- Schwab does not allow dividend reinvesting for foreign stocks. ↩︎
- This is a common psychological bias; once you become aware of something, you notice it a lot more. But also, Portillo’s inspired an episode of The Bear, apparently. ↩︎
- I would be more worried about tariff effects on food prices, if we’re thinking about new policy threats. ↩︎
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