Investment manager

Palm Capital Q2 2022 Investment Manager Commentary

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At Palm Capital, we look for companies with sustainable competitive advantages led by exceptional managers. We patiently wait to invest when their prices are lower than we think they are worth, with the aim of profiting from them as they accumulate economic value over time. We only sell if fundamentals deteriorate or we find others offering potentially better after-tax returns.

Our performance

In the three months ending June 30, 2022, our portfolio fell 24.1% after management fees and trading fees.

Since our inception just over four years ago, our portfolio has returned 3.8% annually after management fees and expenses. We have underperformed the MSCI World Index by 0.6% per year.

End of period June 30, 2022

Our returnλ

MSCI World






1 year




Since inception (annualized)




λafter management fees and transaction fees

graph: Growth of a $100,000 investment

What we know about bear markets

The MSCI World Index officially entered a bear market last month. It has now fallen 21% from the start of the year to the end of June.

Bear markets are tough times for investors. Studies show that the pain of loss is psychologically twice as powerful as the pleasure of gain. As a result, our sense of risk is heightened. We focus on negative news. We extrapolate. And we end up attaching higher probabilities to the worst-case scenario.

Hindsight bias sets in. It seemed obvious that the markets were going to fall – the warning signs were everywhere. The Fed raised its rates. Inflation was setting in. The markets were too expensive.

We go into panic mode. Mental shortcuts lead us to quick and emotional decisions. Our time horizons are shrinking. We ask questions like “how much more will I lose if I don’t sell?” and “When will the markets stop falling?” Our decision-making is affected at the worst possible time.

But we ignore all the other times when there were warning signs and the markets didn’t fall. It’s never as obvious as it seems.

The questions we ask about the direction of the market are useless. The charts on the back show past bear market data dating back to 1929. There is no pattern to them. Markets can completely reverse immediately or drop further for many months. Nobody knows.

chart: past bear market declines

Source: Bloomberg, Palm Capital Analysis

Only two things about bear markets are certain; they are inevitable and eventually come to an end.

Focus on the fundamentals

In these difficult times, it is more important than ever to follow a rigorous process that has been proven to work. Ours is to focus on the fundamentals. Rather than trying to make short-term forecasts, we can look at the strength of the companies we own and their performance.

And for our stock portfolio, prices may have gone down, but they are well positioned to weather tough conditions and they are all still thriving.

The median gross profit margin of the companies we own is 73%. This compares favorably to typical companies in the MSCI World Index, where the gross profit margin averages around 45%. This means that our businesses are less sensitive to cost of sales inflation. It also means they don’t have to raise prices as much to maintain profitability.

The median annual revenue growth for the first quarter of 2022 of the companies we own was 23%. In addition, our portfolio is heavily exposed to digital transformation which shows no signs of slowing down. IDC expects the global public cloud market to grow by 23% in 2022. And as further proof, the three cloud services companies we own are experiencing strong growth, with AWS, Azure, Google Cloud growing at annual rates of 53%, 46% and 37% respectively in the last quarter.

The weakest annual revenue growth in the last quarter among the companies in our portfolio came from Meta Platforms (META, 7% growth). We don’t see that as a cause for concern. After more than doubling its revenue over the past three years, from $55 billion to $118 billion, we consider this a pause. And its growth for the full year should be 15% – not exactly pedestrian. At a price of 13 times earnings (excluding cash), this level of growth is far from priced in.

Here are some comments from recent management calls that further indicate the strength of various businesses we own:

” (we see) widespread strength in advertiser spending and strong consumer online activity Alphabet Management, Q4 2021

“I haven’t heard of companies that view their IT budgets or digital transformation projects as a place for cuts. I don’t haveI’ve seen this level of demand for automation technology to improve productivity, because in an inflationary environment, the only deflationary force is software. Microsoft Management, Q1 22

“As a percentage of GDP, technology spending will, on a secular basis by the end of the decade, double.” Microsoft Management, Q1 22

“We continue to see demand for our systems exceed our current production capacity…. In light of the request of and our capacity increase plans, we plan to review our scenarios for 2025 and growth opportunities bbeyond. CEO of ASML, April 2022

“We believe we will continue to grow above the rate of e-trade and take part. If we look at our record of the last five years, we have always done so. And if we look at Q1, let it be across the scope of our portfolio, we think we did the same thing. Paypal management, Q1 2022

“We believe that digital and cloud projects are always high priority and not deprioritized…we believe that along the long-term digital migration and cloud trends will always be very solid through the cycle…so we feel like we’re at the very beginning of deploying cloud workloads. Datadog Management, Q1 22

Some companies, such as ServiceNow (NOW), have even gone so far as to raise the revenue target for 2024 from $10 billion to $11 billion.

So while bear markets are never pleasant, in the short term prices often diverge from the fundamentals. We cannot predict the price, but the the fundamentals of all the businesses we own are stronger than ever. It has created a once-in-a-decade investment opportunity that we hope to capitalize on.

Mohammad Ibrahim | July 2022

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.