Exploiting the gap between fundamentals and markets

Generally speaking, we are no better than anyone else at predicting future events.  Our skill comes in pragmatically weighing the same fundamentals that everyone else has access to and deciphering when the market has over or under reacted.  Today, an unfortunate news event demonstrated both our lack of ability to perfectly predict the future and our endeavors to respond swiftly and with logical discretion.

Independence Realty (IRT) released 2017 guidance that was far worse than we expected.  I was anticipating high $0.70s to low $0.80s but if you adjust IRT’s guidance for stock compensation, the midpoint is below $0.70.  Unfortunately, this means the dividend is no longer covered by cashflow and is indicative of poor managerial performance.  With negative FFO/share growth anticipated in 2017, IRT is riskier than we had anticipated.

Fortunately, the market either did not notice the weak guidance or didn’t care and IRT traded about flat for most of the day.  This clear gap between significantly disappointing fundamental news and the market reaction allowed us to sell all of 2CHYP’s IRT profitably.  We try to get fundamentals right, but we have and will make mistakes.  In this case, the market’s indifference allowed us to escape profitably despite being wrong on our forecast.

Commentary may contain forward looking statements which are by definition uncertain.  We retain no obligation to update or correct forward looking statements should the available information change. Actual results may differ materially from our forecasts or estimations.

2CHYP Portfolio Snap Shot

1/12/17 2CHYP Performance since inception

2CHYP Weekly Trade Confirmation Report