2022 Q3 Investment Letter

Pernas Portfolio*-4.4%-26.4%21.1%
S&P 500-4.9%-23.9%10.5%
Russell 2000-2.2%-25.1%4.9%
DJ Industrial Average-6.2%-19.8%9.0%
*The ”Pernas Portfolio” is a private account managed by Pernas Research. Performance inception date is 01/01/2017. Periods longer than a year are annualized.

Our performance in the quarter was -4.4% with our main detractor being AOUT and our main contributor being SES. Our cash level has been maintained at 30% and we are becoming increasing in the camp that markets are not pricing in a recession. Inflation has proven more entrenched than we originally anticipated and we have had two negative quarters of real GDP growth. According to Factset, 242 companies in the S&P 500 have mentioned the word “recession” in their Q2 earnings calls. The broad belief amongst business leaders that we are headed for a slowdown can cause a tightening of opex and capex inevitably contributing to a reduction in aggregate demand. Earnings in Q2 of this year grew by 6.7% and would have in fact been negative without the energy sector increasing earnings by a whopping 299%.

We believe this weakness continues into 2023 however the market expectations are looking for an increase in earnings in the mid-single digits range. The primary statistic that is causing market expectations to shrug off a recession is the fact that employment figures are at all-time lows. How can we be headed to a recession when the labor market is the strongest it’s ever been? It’s important to realize that unemployment is a lagging indicator of economic strength and companies can experience headwinds to demand without laying off workers. In its early stages, economic activity can decline without seeing a proportional increase in the unemployment rate. Of course, the data is clear that unemployment does increase when economic malaise continues but given its lagging nature, the decline is more an indicator the business cycle is coming off the bottom as opposed to heading towards it. We continue to believe a defensive positioning is appropriate given a stringently hawkish Fed and market expectations for 2023 that are overly optimistic when it comes to the earnings environment.


We bought Peloton in the third quarter. If we had been told a year ago that PTON’s share price would drop from $165/share to $10/share we would have been highly skeptical to say the least. Although not the largest price drop in history (perhaps that honor goes to Booking Holdings which went from $980/share in ’99 to $6/share in ’00 and is now trading at about $2000/share) – a 95% drop is staggering. To invest in PTON we have to answer three key questions:  1. Is PTON able to survive an anemic demand environment 2. Is PTON more of a trend than a fad? 3. Is it trading at a good price?   The answer to all three of those questions were found to be yes. PTON was at the peak of popularity in late 2020 and early 2021 as COVID accelerated the at-home fitness trend. To take advantage of this surge, PTON invested heavily to become vertically integrated-from manufacturing to last-mile delivery, spending $2B to do so. These investments were ill-timed as subsequently COVID vaccines were approved, and the world returned to normalcy. With the subsequent drop in demand, PTON was left with a bloated cost structure that threatened its solvency. PTON had to reverse course on almost everything it had done prior.  Link to full write up.

Core Civic (CXW) is the largest private prison company in the USA. CXW owns roughly 70k beds and primarily provides and/or manages facilities for ICE and USMS detainees, and state prisoners.  Although the stock is trading at around fair value, we find CXW’s 2026 8.25% bonds to be good value. CXW will continue to benefit from the continued shuttering of older state prisons, the resilience of current customer contracts, and the potential for increased political and societal volatility ahead. Given USMS headwinds and sales of facilities, CXW will generate a normalized EBIT of 220m. It currently trades at about 10x EV/EBIT. Since converting to a C-Corp, CXW has reduced capex spending to solely maintenance (about $80mm per year), halted dividend payments, paid down 600mm in debt, and bought back roughly $50 mm of shares. Given disciplined capital allocation, we believe that CXW will be a double from here, however, we will wait to see continued sound capital allocation before increasing our position. Link to full write up

Past performance is not necessarily indicative of future results. All investments carry significant risk, and it’s important to note that we are not in the business of providing investment advice. All investment decisions of an individual remain the specific responsibility of that individual. There is no guarantee that our research, analysis, and forward-looking price targets will result in profits or that they will not result in a full loss or losses. All investors are advised to fully understand all risks associated with any kind of investing they choose to do.