Dear partners,
Thank you for your continued trust and support; you are the best partners I could ask for. As we wrap up the year, I wanted to include a summarized section from our first quarterly letter:
My goal is that Infuse would be the best-performing public equity fund over the next 50 years. I realize that sounds crazy but that’s the goal – long-term, world-class returns, not absolute assets under management. However, just making the claim that you want to be the best isn’t worth a whole lot without a strategy to make it a reality. To this end, our plan is to hold a concentrated portfolio of the fastest-growing, highest-quality companies in the world at the best valuations we can find. With the long-term goal of world-class returns in mind, we seek to focus on the inputs to the process. After all, that’s what we have control over. Namely, we have control over our specific standards of growth, quality, and valuation. And when we focus, every day, on trying to raise those standards, the outcome will take care of itself.
Now, after just over two years in operation, it was a rather slow start on the journey of executing our audacious goal. But it has allowed us to really get back to our core principles and selectively add wonderful partners. With the fund now beating the S&P since inception and our process getting stronger by the day, we have laid a solid foundation for long-term compounding. But we couldn’t have done it without the steadfastness of you, our partners. We are just getting started and have so much work left to do. We are not letting one ounce of complacency creep in as the market tends to humble the proud. We are not satisfied and will continue to adapt so we can multiply your hard-earned savings. In keeping with the Q4 letter from last year, let’s take a look at the businesses you own a piece of, shall we?
Axon
Axon’s stock is never really cheap but they just continue to execute. New products like DraftOne are adding a ton of value to officers and Axon continues to innovate on its drone platform. While the company trades for a very high multiple, the contracted backlog of more than $9 billion shows that there is potential for at least several billion dollars of free cash flow in the future. However, I am looking to trim this one as I think the valuation has gotten ahead of itself. While selling a truly great company is almost always a bad choice, at some point, the math to justify forward returns becomes quite difficult. Axon’s IRR for the fund has been over 80% annually and I just don’t see nearly as much upside in the future. I do try to be slow to sell big winners as they tend to outperform even sky-high expectations. As we continually raise our standards, one thing I’ve realized is there really aren’t that many truly special companies out there so it pains me to sell a company I put in that category. Even still, sometimes the math just doesn’t quite pencil out and it’s time to trim. Next quarter, we’ll discuss our selling process but for now, we’re paring back a winner based solely on valuation.
Intellego
This is the Swedish microcap that we wrote up last quarter. Intellego makes dosimeters, which are small paper cards that change color when exposed to UV light (specifically UV-C). It seems like a very basic product but the company has strong patent protections and is the brand leader in the space. Since dosimeters are such a low-cost item (often under $5), Intellego has forward-vertically integrated into distributing UV machines to increase dosimeter sell-through. While it’s dilutive for margins and ROIC, it strengthens the competitive advantage significantly. We think it’s possible for the company to do $20 million in EBIT next year and maybe $15 million in FCF but the market cap is only a little more than $100 million. For 40%+ growth, we think this is a very good deal and I wouldn’t be surprised to see the stock double over the next year. Obviously, no guarantees since there are clear risks with a long history of questionable cash flow and board member shenanigans. However, this company fits the Infuse Formula to a tee.
Nu Holdings
Nu is executing on its own audacious vision of becoming one of the largest companies in the world. It surpassed 100 million customers at the beginning of Q2 and is marching towards the next 100 million. As it doubles down on gaining market share in Mexico, it continues to build out its super app in Brazil. High income clients can now book flights, shop, get a payroll loan, buy ETFs, exchange currency, get a business loan based on their personal loan limit, get a cellphone plan, and much more. Nu’s mission is to fight complexity – nothing in that mission statement revolves around banking. I don’t want to fully get caught up in the vision, but the management team has the skills to back up the story. Meanwhile, the top-line is still growing in excess of 30% and margins are encroaching on 30%, while the forward multiple is less than 20x. If we could find 10 companies of this caliber, I would be thrilled.
MercadoLibre
Staying in Latin America, MELI continues to spin its commerce/payments flywheel. While it started out as an e-commerce platform, its fintech business is now much larger. When management pulled back on giving out loans for fear of a worsening economy, overall revenue growth picked up with accelerating GMV in the core e-commerce business. Then, the finance business segment started to reaccelerate when the team realized nonperforming loan ratios were lowered than expected. But the segments aren’t fully independent. There is a beautiful synergy as on-platform payments lower the friction for the commerce business and faster delivery times lead to more orders and therefore more payments. Meanwhile, MELI also offers a plethora of tools for merchants in both commerce and finance. The company is still growing more than 30% and it has a leading brand in Latin America. Someday Nu and MercadoLibre will bump up against each other but I think we still have at least 5 years before they start competing head-on. For less than 30x forward earnings, the valuation is still reasonable for the company.
Shelly Group
Shelly Group continues to truck along. It now is offering chips to make smart appliances even smarter. Through a partnership with Samsung, your fridge can now connect to the Shelly platform. This significantly widens the TAM as there are millions of appliances and Shelly can produce these chips for an extremely low cost with high functionality. While the stock is up more than 2x since our purchase price, I haven’t even thought of selling a share. I think the company could reach $60 million in EBIT by the end of 2026, which implies a 10x multiple of today’s price. A 20x multiple would mean another double in two years, which I’d be very happy with. Broadly, that’s how I think of margin of safety – if the company can reasonably double in two years, then the risk/reward is probably pretty solid.
Tesla
I’ve been very patient with Tesla. Frankly, I’m a big believer in Elon but I also hate investing in companies where the narrative far outweighs any financial evidence. I do see a path to Tesla being one of the world’s largest companies but slight growth in a cyclical industry with very little pricing power is not a recipe for strong forward returns. Though the AI/robotics narrative is strong, I’m not adding at current prices since we haven’t seen much of the narrative translate into the earnings yet. This cognitive dissonance can be an uncomfortable tension but I’m trying to look at the big picture here. So while I fully admit that Tesla may be overvalued in the short run, the long-term destination of the company should not be underestimated.
HelloFresh
This company is the leader in meal kits, which is a historically tough business but they have a fast-growing segment of ready-to-eat meals that is now about a quarter of the business. The company actually has solid infrastructure for creating and distributing meals at scale and we started our position at under 5x my estimated earnings. For a company that could accelerate growth, is rationalizing spending in the core business, and led by a founder, this seems like a pretty reasonable price.
Nvidia
We do still own some Nvidia as the forward multiple isn’t egregious and it powers over 90% of AI workloads. This company is only becoming increasingly important though the hyperscalers are actively trying to save money through their own ASIC programs. The moat CUDA provides has been underestimated time and time again. While I don’t think Nvidia has quite the upside as some of the other companies in the portfolio, it has a product that the best companies in the world literally can’t get enough of.
Two Undisclosed Positions
Lastly, feel free to reach out if you’d like to discuss these companies but I’m not ready to talk about them publicly since they’re pretty illiquid. As the volume picks up, hopefully we can write them up in the future but for now, I’m not even going to give hints :)
Closing
Over the last two years, we have optimized taxes as much as possible. We do try to let our winners run but a few pieces of evidence caused us to lose trust in Alarum’s management. It’s humbling to say this now, just two quarters after writing it up, but we also made it clear that trust in management was the biggest question mark. We did end up selling at higher prices than the current stock price but it never makes me feel good to see a stock crash that we owned. That is a sign of poor business judgment. Even still, we saw the writing on the wall when growth slowed much more than expected and the founder cashed out almost all of his shares. Since we had to react quickly, that built up significant short term gains. Further, we also sold Celsius and Samsara this year due to valuation concerns. These three sales contributed significantly to this year’s tax bill. One of my biggest weaknesses as an investor is worrying too much about taxes to the point of riding winners back to where we bought them but I have been trying hard to overcome this bias so despite not being happy about giving LPs a large tax bill, I do think it’s progress. It’s all about after-tax, net returns so I make every decision with this in mind, but sometimes it’s better to move quickly and change your mind.
I’m quite happy with the blend of growth, quality, and valuation of the companies in the portfolio. But I’m even more pleased with the investor base. I’m honored to have you as a partner. Thank you for your trust and support. It enables me to think long-term and will be our own competitive advantage.
The stock market, like life, will have its ups and downs. All we can do is focus on what we can control and work hard to continually raise our standards. Our strategy is simple – hitch a ride to the world’s best entrepreneurs that are running the fastest-growing, highest-quality companies at the most attractive valuations we can find. Here’s to many more years of focusing on the inputs and letting the outputs take care of themselves.
Sincerely,
Ryan Reeves
Disclosures
Infuse Asset Management LP (“Infuse”) is an investment management company to a fund that is in the business of buying and selling securities and other financial instruments. This information is provided for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security. An offer or solicitation of an investment in a private fund will only be made to accredited investors pursuant to a private placement memorandum and associated documents.
Infuse may change its views about or its investment positions in any of the securities mentioned in this document at any time, for any reason or no reason. Infuse may buy, sell, or otherwise change the form or substance of any of its investments. Infuse disclaims any obligation to notify the market of any such changes.
The S&P 500 is a U.S. equity index. It is included for informational purposes only and may not be representative of the type of investments made by the fund. References made to this index are for comparative purposes only. Reference to an index does not imply that the funds will achieve returns, volatility, or other results similar to the index. The fund’s portfolios are less diversified than this index. Returns for the index are total returns which includes dividends and do not reflect the deduction of any fees or expenses which would reduce returns.
An investment in the fund is speculative and involves a high degree of risk. The portfolio is under the sole trading authority of the general partner. An investor should not make an investment unless the investor is prepared to lose all or a substantial portion of its investment. The fees and expenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and may offset profits.
The information in this material is only current as of the date indicated and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only current opinions of Infuse which are subject to change and which Infuse does not undertake to update. Due to, among other things, the volatile nature of the markets, and an investment in the fund/partnership may only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal and tax professionals before making any investment.
The fund is not registered under the investment company act of 1940, as amended, in reliance on an exemption thereunder. Interests in the fund have not been registered under the securities act of 1933, as amended, or the securities laws of any state and are being offered and sold in reliance on exemptions from the registration requirements of said act and laws.
Performance Appendix
A. Quarterly
Net Returns | Infuse Partners LP | S&P 500 |
Q3 ‘22 | -10.85% | -13.39% |
Q4 ‘22 | -22.21% | 7.09% |
Q1 ‘23 | 10.06% | 7.04% |
Q2 ‘23 | 0.40% | 8.29% |
Q3 ‘23 | -8.52% | -3.65% |
Q4 ‘23 | 16.35% | 11.23% |
Q1 ‘24 | 31.15% | 10.39% |
Q2 ‘24 | 21.86% | 4.34% |
Q3 ‘24 | 6.23% | 5.20% |
Q4 '24 | 11.69% | 2.07% |
Since inception | 54.66% | 42.28% |
B. Annual
Net Returns | Infuse Partners LP | S&P 500 |
2022* | -30.65% | -7.25% |
2023 | 17.62% | 24.22% |
2024 | 89.63% | 23.80% |
Since inception | 54.66% | 42.28% |
CAGR | 19.93% | 15.83% |
*- launch date on August 8, 2022
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