Artko Capital 3Q 2021 Partner Letter
For the third calendar quarter of 2021, an average partnership interest in Artko Capital LP was down 6.1% net of fees. At the same time, investments in the most comparable market indexes—Russell 2000, Russell Microcap, and the S&P 500—were down 4.4%, 5.0%, and up 0.6% respectively. Our detailed results and related footnotes are available in the table at the end of this letter. Our results this quarter came from Northern Technologies, Research Solutions and Potbelly, offset by modest detractions from Gaia, Acorn Energy, and our hedges.
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Peter Rabover
Portfolio Manager
Artko Capital LP
November
14
, 2021
Dear Partner,
For the
third
calendar quarter of 20
21
, a
n average
partnership inter
est in Artko Capital LP
was down
6.1
%
net of fees. At the same time, investment
s
in the most comparable market indexes
—
Russell 2000, Russell
Microcap, and the S&P 500
—
were
down
4.
4
%,
5.0
%, and
up
0
.
6
%
respectively
.
Our
detailed
results
and
related footnotes
are available in the table at the end
of this letter
.
Our results this quarter came from
Northern Technologies
, Research Solutions
and
Potbelly
,
offset by
modest
detractions
from
Gaia
,
Acorn
Energy
,
and our hedges.
4Q20
1Q21
2Q21
3Q21
1 year
3 year
5 year
Inception
7/1/2015
Inception
Annualized
Artko LP Net
17.2%
30.9%
0.5%
-6.1%
44.9%
4.9%
9.7%
96.7%
11.4%
Russell 2000 Index
31.4%
12.7%
4.3%
-4.4%
47.7%
10.5%
13.5%
91.1%
10.9%
Russell MicroCap Index
31.4%
23.9%
4.1%
-5.0%
61.1%
12.2%
14.5%
91.9%
11.0%
S&P 500 Index
12.2%
6.2%
8.6%
0.6%
30.0%
15.9%
16.8%
135.9%
14.7%
Yet
Another Investing Cliché
In the process of communicating with our
partners
these last six years
we have
found ourselves turning
increasingly to
real world examples to
better
describe our investment process or
our view on markets. As
the last two and a ha
lf quarters of
2021 have been extremely
frustrating in the small cap space with our
companies continuing to report excellent fundamental results
while the portfolio returns have continued
to trend flat to slight
ly down
,
we have found ourselves turning to t
he old Warren Buffet
t
investing cliché:
“In the short
-
run, the stock market is a voting machine. Yet, in the long
-
run, it is a weighing machine.”
It
i
s
an elegant, simple and slightly overused cliché that basically
encourages patience in the face of
frustration
.
We think about it often
but
given that the market operates in
the state of
natural chaos
we
tend to gravitate toward visualizing natural forces
as a
somewhat
different descriptor of market behavior.
We tend to view the market and individual
public equity
investment
behavior
more like
one of our planet’s
natural wonders: geysers
.
Much like the market
geysers need a combination of fundamental factors
to
work together in order to
operate
:
water, heat,
the right
plumbing and an occasional earthquake to help
things along.
More importantly, despite so much research
available and a nickname for the most
famous
geyser being “Old Faithful” geysers are actually very unpredictable! Here is what Yellowstone National
Park, home to
more than 500
geysers had to say about their predictability:
“
A geyser is never early or late and a prediction is simply a good gues
s of when an eruption might occur.
In
most cases, predictions are based on information and observations of previous intervals and the length,
size, and characteristics of past eruptions.
It is impossible to predict the eruption time of most geysers
becaus
e complex interactions take place between constantly changing factors. These include
earthquakes, ongoing processes within underground channels, and fluctuations in a system’s water or
heat supply. Most geysers share conduits with other hot springs or geys
ers. At the least, a predictable
geyser is separate from other features or is only connected to a feature that also has very steady activity.
Through the years, observation has revealed that certain geysers have pre
-
eruption characteristics that
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provide cl
ues to predict an eruption time. However, these characteristics, not to mention the eruption
itself, may change at any time!
”
Pretty interesting read. Now re
-
read and replace “geyser” with “market
!
”
Much like geysers
,
markets are
truly unpredictable, thou
gh
through a combination of past observation and knowledge of the
fundamental factors that
contribute to the eruption
process
over
a long enough time frame we can
feel
confident enough that an eruption will occur.
Having studied the microcap index
behavior
for a few
decades and having an (intimate) knowledge of fundamental factors of our portfolio
causes
us
to
feel
pretty comfortable with the knowledge that
o
ur “geysers
,
”
while
impossible to predict
the timing
, have
the right combination of factor
s
for an eventual eruption.
While this is a fun analogy
that certainly shows our enthusiasm for the
intermediate
term return potential
of our portfolio
we are mi
ndful of the economic
environment that is full of
near
-
term uncer
tainties. As we
ha
ve
discussed
in our previous letters to you, our fear
that the current bout of inflation engineered by a
naïve Federal Reserve
(Fed)
was more
than “transitory” and once the
inflation
genie is out of the bottle
it
will be incredibly hard to put him back especially if
wage and pricing expectations psychologically set in.
The current supply chain bottle necks
are likely
to continue to
contribute to
this
behavior.
On the other
hand
,
after over a decade of an extremely accommodative monetary policy essentially
repricing the global
asset base as a
n
ultra
-
high duration time bomb
the Fed
’s usual
suite of
tools to fight inflation
i
nstead of
being a
usefu
l instrument
is now
just
the lighter for the bomb’s fuse.
With such uncertainties ahead no
wonder the small capitalization side of the market hasn’t moved
meaningfully in over a half a year.
We
continue to believe that our portfolio is well
positioned to withstand near term economic uncertainties
,
and we are excited to share
one
of the more important updates to our portfolio that
ha
s
happened in the
last quarter that give us
substantial
confidence that our
portfolio of potential geysers is
well on its
wa
y.
Other Portfolio Updates
•
HireQuest
(
HQI
)
–
Our investment in
staffing franchisor
HireQuest has continued to hit
its thesis
on
all cylinders
as the company led
by long
-
time industry
veteran
and
40% owner
,
Richard Herman
ns
,
made a number of small but si
gnificant ac
quisitions in the second half of 2021.
As a reminder, our
position in HireQuest
which turned from a small
, $20mm market cap,
subscale own
er
of a handful of
branches to a
210
-
branch franchisor
with over 60,000 employees
and an estimated $20mm Free Cash
Flow
generating power in next
12
months. The company’s target is to continue to expand
the markets
that it serves and
,
to that end
,
the last few months have seen a substantial number of org
anic and
acquired developments:
o
In August 2021, the company launched DriverQuest
,
a new franchise offering
that provides
staffing services to the transportation and logistics industries. DriverQuest will focus on staffing
drivers for both long
-
haul and the high
-
growth last
-
mile segments of the market.
At the time of
the announcement over 35 branches out of the 200+ branch network have begun offering the
DriverQuest product to customers.
o
In October 2021, the company announced the acquisition of
Recruit Media
, an
HR tech start
-
up
with a next
-
gen SaaS recruitment platform.
Recruit Media enables candidates to create rich
multimedia profiles to better differentiate themselves and convey their skills to potential
employers.
HireQuest
will integrate the Recruit Media platform with its existing technology suite
used by its franchisees to run their day
-
to
-
day business. Recruit Media’s technology will
streamline workforce communications and allow franchisees to better serve their customer
s.
In
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addition, the public facing web domain,
www.Recruit.com
and its respective
apps, gives
HireQuest a fully functional online job ad and recruitment platform that could become an
additional business line, or stand
-
alone company, in the future.
o
In November 2021,
HireQuest
announced the acquisition of a division of Dental Power,
a 46
-
year
-
old dental staffing company headquartered in Carrboro, North Carolina. Dental Power’s DPS
division is a leading provider of tempor
ary, long
-
term contract, and direct
-
hire staffing services to
private sector dental practices across the United States. The division generated $3.5 million in
revenue for the last
12
months
, relative to HQI’s
~$30mm run rate, so not an insignificant
acquisition.
We believe the
company is well positioned to capitalize on a number of new verticals and
looking
at the
existing opportunity set and
the quality of management we believe this company still has many more
multiples to go from today’s price of $23.00
despite the stock already being a 300%+ winner for us.
Partnership Updates
/Subsequent Updates
We
haven’t had any significant operational or partnership event
s in the past quarter.
Our
fund was up
approxima
tely 10%
for the quarter through the
middle of November
2021.
Next Fund Opening
Our next partnership openings will be
December
1
, 202
1. Please reach out for updated offering
documents and presentations at
info@artkocapital.com
or 415.531.2699.
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Appendix
A
: Performance Statistics Tabl
e
Artko LP Gross
Artko LP Net
Russell 2000
Index
Russell
MicroCap Index
S&P 500 Index
YTD
25.7%
23.7%
12.4%
22.6%
15.9%
1 Year
47.9%
44.9%
47.7%
61.1%
30.0%
3 Year
7.4%
4.8%
10.5%
12.2%
16.0%
5 Year
13.2%
9.6%
13.5%
14.5%
16.9%
Inception 7/1/2015
148.1%
97.8%
92.2%
91.1%
135.9%
Inception Annualized
15.6%
11.5%
11.0%
10.9%
14.7%
Monthly Average
1.5%
1.1%
1.0%
1.1%
1.2%
Monthly St Deviation
6.8%
6.5%
5.8%
6.4%
4.2%
Correlation w Net
-
1.00
0.73
0.71
0.66
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Legal Disclosure
The Partnership’s
performance is based on operations during a period of general market growth and
extraordinary market volatility during part of the period, and is not necessarily indicative of results the
Partnership may achieve in the future. In addition, the results are
based on the periods as a whole, but
results for individual months or quarters within each period have been more favorable or less favorable
than the average, as the case may be. The foregoing data have been prepared by the General Partner and
have not bee
n compiled, reviewed or audited by an independent accountant and non
-
year end results
are subject to adjustment.
The results portrayed are for an investor since inception in the Partnership and the results reflect the
reinvestment of dividends and other e
arnings and the deduction of costs, the management fees charged
to the Partnership and a pro forma reduction of the General Partner’s special profit allocation, if
applicable. The General Partner believes that the comparison of Partnership performance to a
ny single
market index is inappropriate. The Partnership’s portfolio may contain options and other derivative
securities, fixed income investments, may include short sales of securities and margin trading and is not
as diversified as the indices, shown. Th
e Standard & Poor's 500 Index contains 500 industrial,
transportation, utility and financial companies and is generally representative of the large capitalization
US stock market. The Russell 2000 Index is comprised of the smallest 2000 companies in the Ru
ssell 3000
Index and is generally representative of the small capitalization U.S. stock market. The Russell Microcap
Index is comprised of the smallest 1,000 securities in the Russell 2000 Index plus the next 1,000 securities
(traded on national exchanges)
. The Russell Microcap is generally representative of the microcap segment
of the U.S. stock market. All of the indices are unmanaged, market weighted and reflect the reinvestment
of dividends. Due to the differences among the Partnership’s portfolio and t
he performance of the equity
market indices shown above, however, the General Partner cautions potential investors that no such
index is directly comparable to the investment strategy of the Partnership.
While the General Partner believes that to date the
Partnership has been managed with an investment
philosophy and methodology similar to that described in the Partnership’s Offering Circular and to that
which will be used to manage the Partnership in the future, future investments will be made under
diffe
rent economic conditions and in different securities. Further, the performance discussed herein does
not reflect the General Partner’s performance in all different economic cycles. It should not be assumed
that investors will experience returns in the futu
re, if any, comparable to those discussed above. The
information given above is historic and should not be taken as any indication of future performance. It
should not be assumed that recommendations made in the future will be profitable, or will equal, th
e
performance of the securities discussed in this material. Upon request, the General Partner will provide
to you a list of all the recommendations made by it within the past year.
This document is not intended as and does not constitute an offer to sell
any securities to any person or
a solicitation of any person of any offer to purchase any securities. Such an offer or solicitation can only
be made by the confidential Offering Circular of the Partnership. This information omits most of the
information ma
terial to a decision whether to invest in the Partnership. No person should rely on any
information in this document, but should rely exclusively on the Offering Circular in considering whether
to invest in the Partnership.
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