FTRE - Exited
A broken thesis
This’ll be short, and I’ll follow up.
Why we sold: Fortrea announced its earnings and also announced the CEO’s leaving. He took the fall for the business’ financial issues. If you read our report, you know that our thesis rests on him.
We saw substantial room to improve, and several metrics were under Pike. Pike’s no longer here. At this time, it’s unclear to me how much momentum he imparted in the organization the last 2 years vs. how much more remained. Because our reason to invest is no longer true and we cannot handicap the outcome, we have to exit and find an alternative use of capital. Furthermore, Fortrea’s operational issues and financial position are both materially worse than I originally estimated in the downside case. There’s a much higher chance they don’t climb out. And if they do, it will take longer to do so than I thought. We’ll talk more detail as I write a short post-mortem.
Performance impact: The shares were sold at a ~63% loss (in USD). The position had been ~8% of the portfolio (at cost) and thus contributed a ~5.5% loss at the portfolio level. This is approximately tied for our largest all-time loss of ~4-6% of capital in 2016, when a company called Northern Frontier went to $0.
It is not fun to lose money. It does not excite anybody. It does not make clients want to give you money and doesn’t make you look like a skilled authority. It is a part of the game, however, and must be accepted. As my father says: it is what it is. Accept things as they are and make the best calls you can.
Furthermore, I wish to live an authentic life and show candor. I dislike deception in myself and in others. I can’t stand people sandbagging on things when they could just easily admit what went wrong, especially when most of the time they’re already fixing it. To the extent I can, I’d like to influence the world in a way that people around me are more confident sharing mistakes, learning, and moving forward. Because they know it’s OK to do that and we have one another’s backs.
That starts with me. So, I’ll also be doing a short post-mortem on the investment in the near future (we always do this, but I want to be more process oriented about it). Spoiler: my conclusion will probably be that I failed to correctly handicap the left-tail of Fortrea’s potential problems, and this is the reason for my loss. I’ll be tightening my investment criteria for this and other reasons. What went well is that even though we over-bet our hand, we didn’t over-bet massively. We still have nearly 95% of our capital to work with. The substantial majority of that is deployed into ideas where the evidence is strong they are working. In the context of a portfolio where we regularly bet 10% of capital on an idea and sometimes bet 25-40%, we’ve done okay in terms of realized losses. We’ll talk a bit more about what worked and what didn’t soon.
Note the remaining ~3.5% Fortrea position is now cash. I have a few options as to what to do with it but may sit on it. The rest of the portfolio is unchanged.
Chat again soon.
Chris