July 01, 2019

Samir Patel , Askeladden Capital Management

"My life is for itself and not for a spectacle." Qualitative small-cap value investor.

Askeladden Capital Q2 2019 Letter

YTD through 6/28/2019, Askeladden Capital Partners LP returned in excess of ~ +37% gross and ~ + 30% net of all fees, compared to +17% for our benchmark, the S&P 1000 Total Return, extending our track record of outperformance.

The Q2 2019 letter discusses how our watchlist process has enabled us to quickly “reload” the portfolio, maintaining a robust expected return despite the strong year-to-date gains.

2019-06-29 Askeladden Capital Q2 2019 Letter – Askeladden Reloaded

Askeladden Reloaded:

2019

Askeladden Capital

Q2 2019 Letter

samir@askeladdencapital.com

Dear

Partners

Year to date

through 6/28/2019, Askeladden Capital Partners LP

has

returned in excess of ~ +37% gross,

representing a positive spread of over 20 percentage points

compared to the +17% return of our benchmar

the S&P 1000 Total Return.

This brings our cumulative gross performance in the

3.5 years since inception

to ~ +177%, compared to benchmark performance of +59%.

On an annualized basis, returns since inception

have been ~ +33.9

% (

gross) and ~ +26.7

% (net), compared

to benchmark performance of +14

In light of our

material

out

performanc

e over the past three years, the

first

out

performance allocations from a client account are due and payable

this month and ne

xt.

Given

the portfolio outlook, I am not withdrawing a single cent, and have instructed our fund administrators

to roll the entire (

low

mid

five

figure) balance of

out

performance allocations to my LP account on the

appropriate dates. Pro forma for this

roughly 70% of

my investable

(ex

cash)

net worth

will be

held in

Askeladden Capital Partners LP, with the balance in

stocks held by the fund.

Across the fund and SMAs,

actual

fee

paying AUM as of 6/28/2019 exceeds $9 million

, triple what it was less

than

a year ago

, and meaningfully above last quarter

All of this capital wa

s raised organically,

mostly

from people who first encountered me by reading a letter on the internet just like this one.

iven the long sales cycle for institutional investors,

con

versations sparked by

the efforts of our t

hird

party

marketer Maury McCoy

have

not

yet translated into capital.

This is

par for the course;

Maury had the same

experience when he was working with Brian Bares (who now manages billions of dollars.) W

hen

Maury’s

efforts translate into capital, it will likely be with a far larger initial check than we typically get

As usual, we have a number of clients in the process of signing up or contributing additional funds.

Based

solely on committed capital (not “p

rospects”)

, I would

anticipate FPAUM exceeding $10 million by year

Of note, our clients (as well as prospective clients) now include numerous family offices and high net worth

individuals who

seem likely to

substantially increase thei

r allocation to

Askeladden over time. I believe that

we could easily exceed $20MM of FPAUM within a few years solely based on our existing client base.

On the next page, you will find the standard performance chart, with the appropriate disclaimers. Please see

the appe

ndix for additional important disclaimers.

Please also remember that we do not use leverage or

options; we are a long

only plain

vanilla

small

cap e

quity shop.

Our

portfolio tends to be comprised of either

good businesses at great prices, or great busine

sses at good prices

–

we have not participated in FAANG,

cryptocurrency, or other such areas that have been popular (and high

return) since our inception. We run a

classic, cash

flow oriented value portfolio; we buy when things are cheap and sell when the

y’re not.

In the balance of the letter, t

here are two topics I wish to convey:

How

our

watchlist

process

has enabled us to quickly “reload” the portfolio and maintain a robust

(mid

twenties) three

year forward expected

annualized

return, despite substanti

al gains year to date.

Roughly 47% of our portfolio is allocated to companies we have followed for at least three years,

with an additional 11% and 20% allocated to companies we have followed for at l

east two years and

one year.

This substantially redu

ces “familiarity risk”

–

most of the positions we own and are adding

to are companies we have followed longitudinally, observing and learning patiently for quarters or

years before turning them into meaningful positions.

Our evolving views on

concentratio

n/diversification (

we now hold 15 stocks, with the largest

position being merely 22% and the next four positions, in aggregate, representing 35% exposure.

)

Askeladden Reloaded:

2019

Askeladden Capital

Q2 2019 Letter

samir@askeladdencapital.com

DISCLAIMER: Past performance is not a predictor of future results. We do not expect our future ret

urns to approximate

our historical returns. Amounts may differ due to rounding. Cumulative/annualized mult

–

year results may differ from the

product of i

ndividual year results given carry

–

forward provisions

Please consult your monthly statements from Fund

Associates LLC or audited annual financials from Spicer Jeffries LLP for

actual returns. 2019 YTD returns are unaudited

and estimated; data including these returns is expressed using a tilde “~”

to demonstrate they are estimates

. 2016

–

2018 gross returns

are audited.

Cumulative net returns reported here are not audited;

net returns in the table above are

lower than

actual a

udited results

, as

we have normalized for the standard fee structure. Some LPs of Askeladden

Capital Partners pay lower fees, or, such as

myself, pay no fees. As such, audited net returns overstate the return

s a typical LP would experience, and therefore I believe it

would be materially misleading to present actual audited net returns for Askela

dden Capital Partners LP.

Cumulative returns

are calculated assuming a hypothetical investor joined on the date of inception (2016

–

08) and paid

the standard fee structure. Individual

–

year net returns are calculated assuming a hypothetical investor joine

d at the beginning

of the single year, and redeemed at the end of the same year.

Data is presented only for Askeladden Capital Partners LP and not for any of the separately managed accounts which

Askeladden

Capital Management LLC (the investment advisor to Askeladden Capital Partners LP) also oversees.

Please see additional important disclaimers in the appendix.

Askeladden Reloaded:

2019

Askeladden Capital

Q2 2019 Letter

samir@askeladdencapital.com

Do It Now

Remember It Later

Echoes of songs still lurk on distant foreign shores, where we

Danced just to please the gods... who only asked for more

And so it goes.

But still we give... ourselves to this

Can’t spend our lives waiting to live.

“The Dirt Whispered” by Rise Against

In the investment management world, clients don’t care about how goo

d your performance was last year, or

for the trailing five years.

Those might be inputs into their decision to invest new or additional capital with a

manager

but they’re the equivalent of sunk costs.

They’re in the past.

If you’ve made money, all cli

ents care about is the future.

It’s not your trailing three year track record that

matters, but the forward three year returns.

What have you done for me lately?

This is not a complaint, nor a

premature sense of jadedness (I pride myself on being an optimist and have

little tolerance for cynics or

nihilists

It’s simply the nature of reality in the profession that I have chosen.

It’s not irrational behavior by clients; it’s reasonable behavi

or.

There are many investment alternatives;

conti

nuing to hold a suboptimal one represents

a large opportunity cost.

I don’t continue to hold stocks that I don’t think will generate superior returns, so I understand and

appreciate why clients would not

want to continue to hold investments with managers that they do not think

will generate superior returns.

As such, I don’t want to talk extensively about past performance when it’s good.

Past performance is done

and gone

There will come a day where I lo

ok back at my track record and celebrate my success.

But today is not that day, because my track record is just getting started. Beating the market isn’t cause for

celebration. It’s my job.

There’s a reason these letters are signed with “westward on.”

It’s a callback to

Howard Schultz’s “

Onward.”

Ever forward, with a sprinkle of American exceptionalism. Manifest destiny.

Beating my own chest serves no purpose except contributing to a cascade of (negative) cognitive biases.

nstead, I want to tal

k about future performance, and what I’m doing to maximize our chances of achieving

an acceptable result over the

three years.

Askeladden, Reloaded

There is something I’m proud of right now, but it’s not, per

se, our trailing performance. Rather, it’s our

expected

future performance.

For a while now (I don’t remember exactly how long), I’ve had a cell on my portfolio

management

spreadsheet called “CA

GR.” This is a sum

product weighted exp

ected return for our portfolio. There is, of

course,

no guarantee that such a return will be achieved

; I’d like to stress that this is merely a portfolio

management KPI that I use, rather than any sort of explicit f

orecast about future returns (which are

inherently unknowable and unpredictable.)

For each company in our portfolio and on our watchlist, I have an unde

rwritten fair value estimate, i.e. the

price at which the stock would be fairly

valued, using conservat

ive estimates and a 10% equity discount rate.

Askeladden Reloaded:

2019

Askeladden Capital

Q2 2019 Letter

samir@askeladdencapital.com

From that estimate, and the market price, one can come up with a simple three

year forward return

expectation, assuming that the stock trades at my estimate of fair value in three years

’

time. The formula is:

CAGR = { [ (1.1 ^ 3) * (Fair Value) ] / Current Stock Price } ^ 0.3333

–

Of course, this is just a number. My assumptions may be wildly wrong. Even if they’re right, I have not, to

the best of my recollection, had a stock trade at

exactly

my fair value

estimate for more than a few seconds.

Timing is variable, too

–

sometimes things rerate more quickly than three years; sometimes it may take longer.

So this number isn’t some sort of magical dictum from the investing gods; it’s just a number. But it doe

have a use

–

the higher the number, the higher our likely future returns are, assuming my underwritten

assumptions are correct.

All things being equal, we want a higher number.

A higher number means a higher probability of higher

future returns.

On a

n individual stock level, our CAGR number helps us think about whether it’s worth

selling one holding to buy another. On the portfolio level, the number helps us determine whether our

process is successfully generating suitable investment candidates.

Con

sidering that my underwriting threshold is 20% annualized returns over a three

year period, the current

figure

–

24.1%

–

is quite robust,

especially

considering that we’ve had ~ +37% gains year to date and are at a

high water mark for NAV

(i.e. we’re at an

all

time high, not recovering from any deep hole)

24% is

not the

highest figure we have ever seen (the number was above 30 during the December selloff last year), but it’

s still

a very good one. To translate it into more everyday terms, if actual retur

ns meet or exceed this threshold,

then it would take about three years and one quarter to double our capital.

An adjustment should be made, however. The number was

above

26% a few days ago, prior to Franklin

Covey reporting strong earnings. On the price

strength, we trimmed our position some, leaving us with a

cash balance in the 4

–

5% range. We intend to deploy

at least some of this cash over the coming weeks and

months

, and on an ex

cash deployed

capital basis, the current CAGR is 25.3%.

Many funds wo

uld be in a challenging position after a + 37% first half of the year. In many cases, they would

either be sitting on a lot of not

deeply

discounted stocks, presaging lower future returns

–

or they would have

trimmed or sold these positions, thus being un

derinvested

and ending up in the same predicament.

How have we managed to maintain such a robust forward returns outlook? The answer is our differentiated

watchlist process, which I have discussed extensively before.

When I launched Askeladden, my thesis

was

that building a watchlist of quality businesses would allow us to consistently identify good businesses at great

prices, or great businesses at good prices.

In tangible terms, we today have a watchlist of 140 companies that we are intrigued by for o

ne reason or

another; we can

build a portfolio of 15 companies from the 28 stocks in the lowest valuation quintile, picking

and choosing based on qualitative factors (such as our affinity for the business and its management team, risk

factors such as cyclicality and leverage, etc.)

Statistically speaking,

some

stocks will always be out of favor / overlooked / etc; it’s in fact quite surprising

how often we look up to see yesterday’s high

flying growth darlings trading at a bargain

basement valuation

to their

cash flow. Sprouts (SFM)

and Duluth Trading (DLTH) used to trade at multiples we’d never touch

with a ten

foot pole, but today they’re classic value stocks at low

double

digit multiples to steady

state free

cash flow

–

despite long, long runways for accretive capital reinvestme

and capital

free comp growth.

They, like the overwhelming majority of what we own, have a long history of compounding value per share.

Askeladden Reloaded:

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Askeladden Capital

Q2 2019 Letter

samir@askeladdencapital.com

So rather than trying to spend our time looking at what’s cheap today

–

in the process not developing any

long

term IP

, and also spending a lot of time sorting through crappy businesses

–

e prefer to build a

database of

business we like and rely on the statistical likelihood that some fraction of them will be

compelling at any given time.

We like compounders; we just do

n’t like typical “compounder” multiples.

We own 15 stocks today, but the watchlist

–

excluding companies that we’ve hidden for various reasons (i.e.

we’re not interested in owning them at this time, but might be in the future)

–

offers us 22 companies with

20% or greater expected three

year CAGRs. The watchlist further offers 11 companies with 15

–

20%

expected three

year CAGRs, many of which we haven’t looked at in a while

–

meaning that some of them

could very well meet our expected returns threshold.

en our portfolio is essentially fully allocated, our focus (other than on monitoring portfolio positions) is

add new names to

the watchlist. More names = a better statistical chance of owning the intersection of

quality and value. Moreover, as has bee

n frequently discussed in the past, following businesses longitudinally

over time helps build a more nuanced understanding than trying to learn about them all at once.

Unlike a screener that surfaces cheap stocks with no regards for quality

our watchlis

t surfaces

good

businesses

that we already understand very well and have followed for quarters or even years.

In other words, it tees up great

investment opportunities that are right in our sweet spot. And it

will only get better over time as

the breadth

(

num

ber of companies) and depth (

number of updates on existing companies) continues to increase.

It’s a simple process, but one that I believe provides us with a sustainable sour

ce of alpha for several reasons.

First, a substantial portion of the watchlis

t is comprised of stocks that we believe are too small to attract

serious attention from larger funds; more than half of the watchlist is comprised of sub

$1B stocks, with a

third comprised of sub

$500MM stocks and a fifth comprised of sub

$300MM stocks.

Given that

we are

closing to new capital at

$50MM and plan to continue compounding organically to somewhere in the

$100MM

$200MM range, we will always be able to invest in such stocks, unlike many of our peers.

Second, just because there is no

physical

moat around a business process does not mean that it is trivial to

replicate.

As former Sprouts CEO Amin Maredia observed at an investment conference several years ago:

Every format you walk in and it always looks like it's easy to emulate or copy. We ca

n all walk into Chik

fil

A right

now and go, how hard is this? But it is, right? And it's really something we've built over 20 years that's special.

This rang true to me: while there are many examples

we’ve seen

(LGI Homes atop the list), the one that will

resonate best with most readers is Chipotle.

It seems deceptively simple: how hard is it to put out thirty

boxes of ingredients and let patrons pick what they want on their burrito?

But despite the vast abundance of capital in the restaurant sector (th

ere is no shortage of new res

taurants), I

cannot think of many concepts that have managed to execute a Chipotle

like model at scale

Remember

when everyone got excited about Pie Five after a spiffy presentation at ICR? Anyone?

Our watchlist and research

documentation process is like that

–

easy to describe; very hard to execute.

Enough theory. On the next page is a redacted table overviewing what we own (clients have access to the

unredacted

director’s cut

in the separately

delivered

page

quarte

rly po

rtfolio commentary.)

Observe

that we own a portfolio of

generally

modest to high growth businesses, with a skew towards owner

operators, with conservative balance sheets

–

most of which, with a few exceptions, trade no higher tha

n a

low

teens EV/NOPAT

multiple

, and some of which trade for single

digit EV/NOPAT multiples

. We’re not

sacrificing quality for price; we can have both at the same time because of our differentiated approach. Our

portfolio is the equivalent of the produce section at Sprouts.

Askeladden Reloaded:

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Askeladden Capital

Q2 2019 Letter

samir@askeladdencapital.com

Company

/weight

capital

intensive?

description

CAGR

current

valuation

fair value

estimate

balance sheet

Franklin

Covey

(FC) //

22.4%

contractual high

margin recurring

revenue SaaS

esque business with outsider management. Long

growth runway

24.1%

20x

FCF

(2020/2021

blend)

30x FCF

(2020/2021

blend)

roughly neutral

balance sheet (trivial

/ immaterial debt)

AerCap

(AER) //

11.0%

yes

leasing business with strong, contractual multi

year economics and one of the best capital

allocators (Aengus Kelly) we

have ever personally

observed

22.1%

7.7x P/E

(2019)

10.5x P/E

(2019)

2.7:1 levered

Secret //

8.6%

foreign

consumer brand with meaningful growth

potential and sophisticated management

35.8%

10.8x

EV/NOPAT

(2018/2019

blend)

18.3x

EV/NOPAT

(2019)

1 x

EV/EBITDA net

debt

Duluth

Trading

(DLTH)

8.0%

semi

beloved and strongly differentiated high

growth

consumer brand with owner

operator. Long

growth runway.

29.5%

12.2x

EV/SSNOPA

T (2019)

19.0x

EV/SSNOPA

T (2019)

1 x EV/EBITDA net

debt

LGI

Homes

(LGIH)

7.6%

yes

unique, differentiated high

growth business

model with stellar economics in a tough industry,

run by owner

operator

15.2%

9.3x P/E

(2019)

10.7x P/E

(2019)

3x+ EV/EBITDA net

debt

Secret //

6.2%

owner

operated

niche cyclical industrial with a

long growth runway. Takeout candidate

38.1%

8.3x

EV/NOPAT

(2018)

20.0x

EV/NOPAT

(2018)

substantial net cash

Secret //

5.2%

foreign

high

growth

consulting/software

company with quasi owner

operator. Takeout

candidate

21.4%

13.0x

EV/NOPAT

(2019)

18.2x

EV/NOPAT

(2019)

substantial net cash

Secret //

4.7%

yes

high

growth heavy industrial company with

strong ROIC and huge macro tailwind

21.6%

9.7x

EV/NOPAT

(2020)

14.3x

EV/NOPAT

(2020)

roughly neutral

balance sheet (trivial

/ immaterial debt)

Secret //

4.7%

quasi

historically well

managed but currently

challenged cyclical industrial

32.8%

13.6x

EV/NOPAT

/ 10.4x P/E

(2019)

19.0x

EV/NOPAT

(2019)

3x+ EV/EBITDA net

debt

Sprouts

Farmers’

Market

(SFM) //

4.5%

yes

differentiated

business model with good

economics, a long growth runway, and a big

macro tailwind in a very tough industry

25.1%

13.4x

EV/SSNOPA

T / 11.7x

P/SSFCF

(2019)

18.4x

EV/SSNOPA

T (2019)

2x EV/EBITDA net

debt

Secret //

2.9%

niche industrial with ex

Danaher

CEO

10.50%

20.0x

EV/NOPAT

(2019)

20.0x

EV/NOPAT

(2019)

2x EV/EBITDA net

debt

Secret //

2.9%

foreign

high

growth recurring

revenue s

oftware

company with owner

operator

basically never

loses customers to competition (extremely high

retention)

21.1%

15.6x

EV/NOPAT

(2019)

20.0x

EV/NOPAT

(2019)

2x EV/EBITDA net

debt

Secret //

2.9%

quasi

Growing

multinational i

nfrastructure

technology

leader run by owner

operator. Long growth

runway and call option on autonomous vehicles

22.6%

11.6x

EV/NOPAT

(19/2020

)

15.4x

EV/NOPAT

(2019)

1 x EV/EBITDA net

debt

Secret //

2.0%

yes

somewhat differentiated business model with

stellar economics in a tough industry. Shortening

growth runway with competitive questions.

22.5%

10.3x

EV/SSNOPA

T / 8.8x

P/SSFCF

(2019)

13.3x

EV/SSNOPA

T (2019)

2x EV/EBITDA net

debt

Liquidity

Services

(LQDT)

1.5%

growing technology platform run by owner

operator

30.1%

not

meaningful

to value on

near

term

cash flows

not

meaningful

to value on

near

term

cash flows

substantial

net cash

Cash

4.5%

Total Expected Return

24.1%

One thing to note here, again, is that “CAGR” is just a number. It is not the only decision metric we use.

For example, purely on the basis of expected return, one could ask why we don’t sell some Franklin Covey

(FC) and AerCap (AER) to buy other, higher

return names, such as the two 8

–

9% positions.

There’

s a simple reason for this: FC and AER

stand head and shoulders above most of the rest of our

portfolio with extremely low

risk business models and management teams

for which we have extremely high

reg

ard and trust.

Both Franklin Covey and AerCap are highly insulated from economic volatility and near

Askeladden Reloaded:

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Askeladden Capital

Q2 2019 Letter

samir@askeladdencapital.com

term competitive pressures, as they have multi

year contracts with locked

in profitability; said differently,

unless their counterparties default

en masse

(extremely unlikely in both cases), then any negative variances vis

vis our expectations of their earnings should be modest, notwithstanding

the macro.

No matter what happens in the world, we are very confident that Franklin Covey and AerCap will cont

inue to

have steady, predictable, and very profitable results.

Moreover, both companies have a history of aggressively

repurchasing shares, so any dips in the share price would result in higher long

term returns for shareholders.

Conversely, some of the s

till

large but smaller positions

while very attractive

have their own idiosyncratic

risks, such as the competitive environment, or exposure to consumer spending that might partially (though

not severely) dry up in a downturn.

Our goal is to run an all

weather portfolio; eschewing all leverage and consumer discretionary risk means

foregoing plenty of quite

attractive opportunities that can provide great returns

and at a certain cash flow

multiple, these businesses are often priced for “trough” earnings

anyway (i.e., we have a big enough margin of

safety to endure a challenging economic environment and still make money.)

On the other hand, of course, it would be unpleasant (not to mention overly

risky) to

only

own such

businesses; having now seen hundred

s of companies deliver probably thousands of earnings reports, I’ve

come to appreciate the “no surprises” results that come with a business with contractually recurring revenue,

vis

vis businesses that have to start each year with zero in revenue.

Som

e Thoughts on

Concentration and

Diversification

I’ve always maintained that hyper

concentration was

more a temporary rather than permanent phenomenon

;

I’m not sure anyone believed me, but I have pretty consistently told existing and prospective clients, since

inception, that running the fund with a 30%+ position was not what I intended to do on a continual basis

–

simply seemed like the appropriate

response to having a disproportionately attractive, extremely high

return

and low

risk investment opportunity (most recently, Franklin Covey in the low $20s.)

Beyond this, I’ve also always maintained that running a sub

10 stock portfolio was not what I i

ntended to do;

it’s just where I found myself sometimes because I didn’t see enough breadth of opportunities to justify

replacing allocations to stocks 1

–

7 with allocations to stocks 8

–

15. Today, that’s not the case, and

–

while

it is always difficult

to make forecasts, especially about the future

–

I would anticipate running closer to the

higher than lower end of our targeted 10

–

15 stock portfolio.

There are several reasons for this. The first is that as I’ve matured as a portfolio manager, I have

realized

how silly some of the dictums oft

repeated by value investors are. For example, low turnover to the

exclusion of all else is a dumb goal. As one of our clients

–

a professional investor himself

–

quips, “you

really want

to buy stocks that go up

really fast, then sell them to buy other stocks that go up really fast.”

There are merits to tax sensitivity, familiarity with and affinity for the business, etc, which I do consider, but

those can be incorporated without changing the thrust of the point

–

it’s silly to lock ourselves in to owning

businesses for three years just because we underwrite for three years; if we buy something we think is worth

$10 for $7, and a few months later we look up and see it’s trading for $9.50, it makes total sense to tr

im or

liquidate the position and redeploy the proceeds into another 70

cent dollar from our watchlist.

There is actually a data

driven reason we are discussing this.

Our experience has not necessarily suggested

that our largest positions are always the bi

ggest

IRRs

; while that doesn’t mean they shouldn’t be the largest

Askeladden Reloaded:

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Q2 2019 Letter

samir@askeladdencapital.com

positions (as other considerations, such as invisible risk borne, are important too), the fact remains that every

year, we’ve had some small positions skyrocket, and disproportionately contr

ibute to returns.

Looking o

ver trade records

, here is some data

–

please note that I’m not sure if I’m capturing commissions in

these numbers, but they would be completely immaterial to the scope of the discussion

We purchased a small position in MiX

Telematics (MIXT) in May 2017 at a cost basis of $6.05.

Between June and December 2017, we liquidated this position at a weighted price of $9.82

–

a 60%+

premium to our purchase price. I’m too lazy to calculate per

lot IRR, but obviously, earning 60% in

half a year is a very good outcome.

Also in 2017, we purchased a small position in tiny Canadian home

security company AlarmForce

(AF.TO). This position was established at a cost basis of $9.90 in September 2017; the company was

acquired

for a 60% prem

ium later that year, and we sold our position for $15.99 per share in

November 2017.

early

2018, we purchased a small position in Dynamic Materials / DMC Global (BOOM), paying

an average of $22.81 per share.

Although we loved the company, given thei

r exposure to oil prices,

and our other energy exposure in the portfolio, we did not feel it was appropriate to make the

position very large.

As the market reacted positively to strong earnings, we liquidated the position

between April and July at an aver

age price of $42.05 per share, or a premium of over 80% in, again,

less than half a year.

At the end of February 2018, we purchased a small position in high

margin recurring

revenue

software company Zix (ZIXI), paying an average price of $3.95 per share.

The market quickly

realized that the business was better than the multiple, and before the company had even reported its

next earnings report, we were able to liquidate our position for $4.89

–

a gain of over 20% in merely

a couple months. (ZIXI, today,

trades for over $9 per share, for what it’s worth.)

In mid to late 2018, as well as early 2019, we purchased shares in niche software company

Globalscape (GSB).

Focusing solely on our higher

cost purchases in 2019, we

purchased shares on

March 1

for $5

.86 per share. Over the ensuing four months, we have entirely liquidated the

position at

prices between $7.39 and $10.04, with a weighted average of $9.11. Again, I’m too lazy to

calculate IRR, but the point remains that we earne

d a 50%+ return in a shor

t timeframe.

Finally, in December 2018, we put on a tiny (and I mean really tiny, I think it was 20 bps) position in

telematics company Pointer Telocation (PNTR) at a cost basis in the low $12s. A quarter later in

mid

March, the company announced it was

being acquired, and we liquidated our position in the

high $15s

–

again, a greater than 20% gain in a very short time period.

There are a few other examples we have excluded for brevity. Admittedly it’s a small sample size, but t

point here is that some

times really good things happen to stocks really quickly, and they’re not really

predictable ex ante

–

yet we seem to get at least one quick pop per year from a smaller position. Conversely,

of course, we’ve had large positions

like FC

–

that ended up wor

king out well!

–

languish

for quite some time.

Although we’re not trying to optimize for short

term performance, having more shots on goal seems like the

best way to maximize our chances of getting some quick wins as well as more methodical, longer

term

returns. I’ve always believed that if the returns expectations are the same and the risks not materially

different, more positions are better than less all things equal, and as the watchlist has gotten larger, we’ve

Askeladden Reloaded:

2019

Askeladden Capital

Q2 2019 Letter

samir@askeladdencapital.com

gotten more and more opportunities

–

find it increasingly difficult to state categorically that 10 or fewer

stocks are infinitely superior to

all other opportunities we see, such that we should

only

own 8 stocks.

A second consideration is risk. With extremely large positions, there is obviou

sly elevated risk that a single

wrong assessment by me would materially impair returns; compounding this issue, it is far easier to get

emotionally involved in large

positions than in small ones

–

creating the potential for behavioral errors such

as commit

men

t bias / change blindness, etc.

Conversely, nobody gets too

attached to sub

500 bps positions.

One of the things I think I’ve improved on the most is having emotional distance between me and the

portfolio; when I started Askeladden, I was definitely em

otionally invested in my investment theses

–

today,

that is the case much less frequently; I feel more like a dispassionate observer than a cheerleader.

I’m much

more willing to cut a position and move on, whether or not the position is showing a gain.

’s the difference

between watching a sports game when you’re not a fan of either team, and when you are a fan of the team

–

you make far more objective judgments when you’re not rooting for either side.

Of course, there are tradeoffs here; for example, we

are probably taking modestly more cyclical risk today

than we would be if I simply put more money in Franklin Covey, AerCap, and several other

non

cyclical

positions. On balance,

though,

I still think the portfolio is lower

risk for the incremental divers

ification.

Important

ly, I think there are limits. Empirical evidence is often quoted suggesting that the benefits of

diversification tail off quickly

beyond 15

20 stocks

. More practically, as a one

man shop with an intensive

research process, it’s simply

not practical to run a 20

–

30 stock portfolio

–

all my time would be spent

monitoring the portfolio, and so any benefits of diversification (or otherwise) would be offset by having less

research time available to spend on identifying new opportunities.

Ultimately, while I’m not changing my targeted 10

–

15 stock range

–

and would be perfectly comfortable

running a 10 stock portfolio

–

I do feel a preference for the higher end of the range (i.e., 12 to 15 stocks.)

Please note that I would also be perfect

ly comfortable with a 16

–

17 stock portfolio, under the assumption

that some of those stocks were close (but not all the way) to monetization.

Conclusions

We have been extremely fortunate to have such strong results

over the past 3.5 years

. While these

returns are

clearly unsustainable,

I’m still very optimistic about being able to achieve superior returns over time

–

which

is why I continue to deploy

sizable chunks of

my own capital into the fund as it becomes available

We have also been extremely for

tunate to have a base of long

term, value

oriented clients who understand

our process. We have a heavy skew towards investment professionals, which is gratifying

–

many of our

clients are current or former professional investors, whether that means active

management or another area

of the financial world (such as wealth management.)

Three and a half years ago, I launched Askeladden Capital with no paying clients, hoping it would turn into a

sustainable business. While I’m never going to be a master of the

universe, I am now the master of my own

destiny

–

Askeladden has enough clients and business momentum to support a modest but comfortable

lifestyle, and proprietary intellectual property that positions us well to continue generating strong results.

Westwa

rd on.

Samir

Askeladden Reloaded:

2019

Askeladden Capital

Q2 2019 Letter

samir@askeladdencapital.com

Appendix

–

Important Disclaimers

lease note that

YTD figures are

estimates based on our brokerage statements

–

they do not factor in

nuances of the accounting for performance allocations that is perform

ed by our fund administrator

–

hence

our use of the tilde “~” to represent that results are estimated

Gross returns

from

inception through

12/31/2018 are

audited. On YTD data, we

attempt

to round down for conservatism and expec

t that actual

statements as of 6/30

should reflect the

se numbers (within rounding error),

or better.

SMA clients should also note that the returns discussed in this letter are only for Askeladden Capital Partners

LP, and individual SMA account performance may vary due to tracking error, account parameter rest

rictions

(such as international trading permissions), and other such factors.

Fees are also reported for an investor

paying the standard fee structure; investors paying a different fee structure (such as non

–

qualified clients to

whom we cannot legally cha

rge a performance fee) will obviously have different results, whether they are

A clients or LPs of the fund.

As such, please consult your own account statements to determine your

individual account performance.

Moreover, please also note that investors

in Askeladden Capital Partners pay a variety of fee structures

–

including my own capital, which pays no fees, and non

–

qualified clients on whose accounts I cannot legally

charge performance fees.

This means that Partnership

–

wide audited returns reflect a

variety of fee structures,

and this fee structure on average (factoring in, for example, my account not paying any fees at all) results in

partnership

–

wide fees being materially lower than the stated fee structure.

Therefore

, I believe it would be mislead

ing to report the Partnership’s actual audited net returns in the table

above, as they would materially overstate the returns that would have been achieved by a client paying the

standard fee structure.

As such, instead, in these letters, I report fees fo

r a hypothetical investor paying our

standard fee structure. Cumulative net results in the table above are thus materially lower than actual audited

net results, but, in my estimation, substantially more useful for analytical purposes.

Investors with any

questions are welcome to review our audited financials for 2016

–

2018.

Past performance is not a predictor of future results. We do not expect our future returns to approximate our

historical returns. Amounts may differ due to rounding.

Net returns are

calculated assuming a hypothetical

investor paid the standard fee structure of a 1.5% annual management fee and 30% of the outperformance, if

any, vs. the S&P 1000 Total Return index,

which was chosen because it had, at the time of inception,

historically

outperformed the Russell 2000 and most accurately represents our typical investment universe of

small and mid

–

capitalization U.S. equities (i.e., those with a market cap of $10 billion or less). We may invest

outside this universe (for example, in U.S. lar

ge caps or international small caps.)

This is not an offering of securities or solicitation thereof; any offering of securities would only be made to

accredited investors via a Private Placement Memorandum under Rule 506(c) of Regulation D, and any

prospe

ctive partners who did not have a pre

–

existing relationship with Askeladden as of 1/18/2017 would be

required to verify their accredited status with relevant documentation. This requirement does not apply to

separately managed accounts. Any documents prepa

red prior to 2017

–

18 were not intended for public

distribution and should be read accordingly. Askeladden Capital Partners, and SMAs that mirror its strategy,

should be considered high

–

risk investments suitable for only a small portion of an investor's

overall portfolio,

as they involve the risk of loss, including total loss. Specific risk factors

are enumerated in our Form ADV.

Samir Patel, Askeladden Capital Management

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Jan 11, 2017

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