Q1 2025 Portfolio Update

The year has begun tough, with little sign of improvement. Yet, market declines present opportunities for long-term investors.

I hope the year has started off well for you. I am pleased to share with you the latest update on our portfolio. I trust you will find this update insightful.

We began 2025 on a strong footing, despite ongoing market volatility. From inception through March 31, 2025, the portfolio delivered a cumulative return of 92.82%, representing an annualized return of 15.11%. In the first quarter, the portfolio gained 4.3%, although performance was tempered by a 4.8% decline in February. By comparison, the S&P 500 declined by 4.60%, the Russell 2000 fell 9.80%, and the Global Small-Cap Index contracted by 4.42%.

This performance is primarily attributable to the surge in gold prices. Gold has delivered exceptional returns, driven by heightened uncertainty, escalating trade tensions, and inflationary pressures, among other factors. During the period, the price of gold rose by approximately 14%. Simultaneously, we observed significant capital inflows into gold-linked ETFs, which contributed to a 27.5% increase in the value of our position in mining companies held through an ETF during the quarter.

In the letter from the last quarter of the previous year, I noted that we wouldn’t see tariffs as they were primarily a negotiating tool. It seems I may have been mistaken, at least in the short term, given that the tariffs have not yet been enacted. However, I still believe the announced tariffs will not be final; they are likely to be significantly reduced, and some may even be rescinded.

US stock markets experienced a downturn in the first quarter, mainly driven by domestic policy developments that created significant uncertainty among investors, business leaders, and international trading partners. The first phase of the Trump administration, characterized by inconsistent messaging, erratic behaviour, a significant misstep by the Secretary of Defense, and a high-profile deportation error, eroded market confidence and fuelled growing concerns. From an investment standpoint, the dominant theme of the quarter was the administration's confrontational approach to global trade, impacting both allies and adversaries alike. In contrast, European stock markets exhibited greater resilience, with Spain's IBEX 35 index recording a solid 12.5% gain over the period.

Looking ahead to the second quarter, I anticipate a more complex landscape. We will seize the opportunities the market presents to expand our holdings or enter companies from our watchlist, although these companies are currently expensive, and we have not yet identified the right moment to add them to our portfolio.

Investment Mistake

While I value learning from the mistakes of others, I also believe it is essential—both as an exercise in transparency and for your benefit—to share my own missteps. One of my most significant investment errors was an omission in 2020, largely influenced by external opinions.

At the time, I had conducted extensive research on Orsero, analysing its competitors, industry dynamics, and business model in great depth. Despite my thorough due diligence, I sought the perspective of an "analyst" who dismissed the company, arguing that its upside potential was limited due to its business model and the sector in which it operates—questioning, "Who’s going to buy pineapples and bananas?" The sector was generally perceived as unattractive. Consequently, I chose not to invest. At the time, Orsero was trading at €5 per share; today, it is valued at over €12—an increase of more than 100% (excluding dividends).

This experience underscored the critical importance of independent thinking in investment decisions. Since then, I have refined my approach, prioritizing rigorous fundamental analysis and developing my own convictions. When seeking external insights, I now turn directly to company management whenever possible. If access to management is unavailable, I rely on analysts with direct exposure to the company’s leadership, ensuring I receive informed perspectives rather than generalized opinions.

Ultimately, successful investing requires trust in one’s research, a deep focus on company fundamentals, and the discipline to think independently. Combined with a long-term vision and patience, these principles are fundamental to making sound investment decisions.

“You can’t be a good value investor without being an independent thinker – you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do” - Joel Greenblatt.

Portfolio overview: investments and divestments

During the first quarter, no divestments were executed. However, I initiated a position in Toya and further increased my stake in Sanlorenzo. Both companies exhibit robust financial fundamentals and a strong alignment between management and shareholders, underscoring a clear commitment to long-term value creation. Below is a summary of these investments:

Toya (TOA): A Polish small-cap company with a market capitalization of approximately PLN 540 million, specializes in the import and distribution of hand tools, power tools, and household appliances. Founded in 1990 by Jan Szmidt, the company went public in 2011 at PLN 2.8 per share. Since its initial public financial statements in 2008, Toya has demonstrated a compound annual growth rate (CAGR) of 9.65% in sales and 9.72% in net profits, consistently achieving double-digit returns on invested capital.

Despite recent macroeconomic challenges, Toya exhibited resilience with a 12.1% increase in sales in 2024, driven by robust performance in wholesale and export channels, coupled with a strong e-commerce presence in Poland. However, rising costs and operational expenses led to a contraction in EBIT and EBITDA. The company maintains a strong financial position, with a low Net Debt/EBITDA ratio of 0.17x, reflecting minimal leverage. Its normalized Price-to-Earnings (P/E) ratio of 7.20x remains well below the sector average, indicating potential undervaluation. With a diverse product portfolio of over 13,000 items sold in more than 120 countries, Toya continues to expand globally. While liquidity and geopolitical risks remain, the company’s robust cash flow and the planned share repurchase program (with PLN 100 million allocated for this purpose) further bolster its appeal as an investment. After revising my initial valuation and adopting a more cautious approach, I have adjusted the intrinsic value to PLN 15.80 (down from PLN 20 previously) in the base case, which underscores the company’s long-term growth potential.

Sanlorenzo S.p.A. (SL): A leading luxury yacht manufacturer with significant growth potential, Sanlorenzo posted a solid performance in 2024, reinforcing its competitive market position and strategic expansion. While the company's growth trajectory has normalized following a period of exceptional expansion—an expected development already considered in my valuation model—it continues to demonstrate solid operational execution.

Despite a slight 2.1% decline in the order book, Sanlorenzo maintained a strong financial performance, supported by effective leadership and management continuity, with the CEO retaining a majority stake. Key financial indicators underscored the company's resilience: net revenue from new yachts grew 10.7% year-on-year to €930.4 million, driven by significant expansion in the AMER and MEA regions. EBITDA increased by 12.0% to €176.4 million, while EBIT increased by 10.6% to €139.3 million. The company maintained a solid net cash position of €112.8 million despite the €34.8 million dividend payment. The order backlog remained strong at €1,019.8 million, with 88% covered by end customers.

Sanlorenzo continues to prioritize strategic growth initiatives, including targeted acquisitions and technological innovations that further strengthen its competitive advantage. CEO Massimo Perotti highlighted the company's remarkable success in quadrupling its net profit since 2019 and expressed confidence in maintaining sustainable long-term growth. Thanks to prevailing macroeconomic uncertainties and an undervalued sector, Sanlorenzo is trading at attractive valuation multiples, maintaining a debt-free balance sheet. Furthermore, its experienced management team holds a significant stake, ensuring strong alignment with shareholder interests. Considering these factors, I have continued to increase my position, as the company remains significantly undervalued.

Furthermore, it is worth noting that between March 12 and March 31, 2025, a series of insider transactions totalling approximately €1.9 million were executed. This activity demonstrates management's confidence in the company's intrinsic value, which is higher than the current prices, and long-term growth prospects. Given that the management team has historically made purchases at higher prices, it is understandable that they would seize the opportunity to acquire shares at an even greater discount now.

“If you do it at the right price, there’s nothing better than buying in your own business” - Warren Buffett

The following table provides a snapshot of the current investments in the portfolio:

Conclusion

I remain confident in our positions and continue to manage available liquidity with a disciplined and cautious approach in line with my long-term vision. The companies in the portfolio continue to demonstrate solid business fundamentals and are still trading below their intrinsic value. It’s only a matter of time before the market fully recognizes their worth. I will maintain the same independent decision-making process I’ve always upheld, seizing opportunities when valuations are compelling and aligned with my goal of creating sustainable, long-term value.

Looking forward to the upcoming quarters – it’s going to be a fun-filled year ahead!

Thank you for your continued support and trust in smallvalue.

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Disclaimer: All information provided herein by smallvalue is for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in any security. Smallvalue 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.