Investor Letter - July 2021 Long/Short Equity ETF (CBLS) Sustainable Equity ETF (CBSE) - www.changebridgefunds.com
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www.changebridgefunds.com Investor Letter – July 2021 Long/Short Equity ETF (CBLS) Sustainable Equity ETF (CBSE)
Performance Table: July 31, 2021
Total Return %
Fund Name
Symbol 1 Month 3 Month Year-to-Date Since Inception
Changebridge Capital Sustainable Equity ETF (NAV) -2.94% -2.71% 21.91% 45.20%
Changebridge Capital Sustainable Equity ETF (MKT) CBSE -3.04% -2.78% 21.72% 45.10%
S&P 500 Index SPX 2.38% 5.50% 17.98% 25.56%
Changebridge Capital Long/Short Equity ETF (NAV) -1.12% -6.13% 9.93% 27.85%
Changebridge Capital Long/Short Equity ETF (MKT) CBLS -1.21% -6.58% 9.69% 27.70%
Wilshire Liquid Alternative Equity Hedge Index WLIQAEHT 0.73% 1.87% 10.18% 14.18%
Performance data shown above represents past performance and is no guarantee of and not indicative of future results. Total return and value will vary, and
you may have a gain or loss when shares are sold. Current performance may be lower or higher than quoted. Returns include changes in share price and
reinvestment of dividends and capital gains, if any. Please go to https://changebridgefunds.com for full month-end and quarter-end performance. The
inception date of each fund is 11/13/2020.
Market Returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time, when the NAV is normally calculated for ETFs. Your return
may differ if you trade shares at other times. After-tax returns are calculated based on NAV using the highest individual federal income tax rate and does not
reflect the impact of state and local taxes. Actual after-tax returns will depend on an investor's tax situation and may be different from those shown. After-
tax would not be relevant to shares owned through a tax-deferred account such as an IRA or 401(k) plan. The return After Taxes on Distributions and Sales
of Fund Shares may exceed the Return Before Taxes due to an assumed tax benefit from the pass-through of foreign tax credits and/or from losses on a sale
of Fund shares at the end of the measurement period.
Changebridge Long/Short Equity ETF Expense Ratio: 2.10% Changebridge Sustainable Equity ETF Expense Ratio: 0.85%
Monthly Performance and Market Review:
In July of 2021, the Changebridge Capital Long/Short Equity ETF (CBLS) returned -1.12, underperforming its
benchmark Wilshire Liquid Alternative Equity Hedge Index by 1.85%. For the year-to-date, CBLS was up 9.93%,
underperforming it’s benchmark by 0.25%.
The Changebridge Capital Sustainable Equity ETF (CBSE) returned -2.94% during the month, underperforming its
benchmark S&P 500 Index by 5.38%. For the year-to-date, CBSE was up 21.91%, outperforming it’s benchmark
by 3.93%.
In July, we were struck with a few distinct feelings of déjà vu. We’ve all heard that history does not always repeat,
but it often rhymes. As investors, we are hearing a few of those rhyming patterns recently. For one, market
leadership is again consolidating into the “FAANGM” (Facebook, Apple, Amazon, Netflix, Google, Microsoft) stocks,
presumably as concerns around a Delta variant of Covid-19 push investors towards perceived safety. In this case,
safety is being defined by the question, ‘what worked in the past?’
One pf the prevailing sentiments seems to be that this part of the cycle is at least reminiscent of the benign market
conditions of 2016-19. During that stretch, fears of an economic slowdown, global trade wars and a potential
policy misstep from the Federal Reserve were ultimately proven to be unfounded, and a boom in the tech sector
drove the major stock indexes higher. The 2016-19 stretch was also characterized by large capitalization
companies (as represented by the Russell 1000 Index) up ~70%, outperforming small capitalization companies
(as represented by the Russell 2000 Index), which was up ~55% during the same period.
The presumption that size is correlated with safety strikes us as a potential market risk which investors may want
to reconsider through the lens of diversification. With that in mind, Yardeni Research recently estimated that
FAANGM stocks make up nearly 25% of the market cap of the S&P 500. 1 This means just six stocks out of ~500
carry a combined 25% weighting in the index. From our perspective, the S&P 500 does not exactly look like the
1
https://www.yardeni.com/pub/faangms.pdf“broad cross-section of the U.S. equity market” that it is intended to represent (as described by index-provider S&P
Dow Jones Indices 2). In fact, an equal-weighted portfolio (meaning each position has the same weighting in the
portfolio regardless of market capitalization) that has a similar 25% weighting to six securities would, by definition,
have only 24 positions in aggregate. The Changebridge Capital Sustainable Equity ETF (CBSE), our actively-
managed long-only fund, concluded the month of July with a total of 33 long positions. Among the top 6 securities
(CVEO, CTRO, SKY, EXPE, CVS and SMLR) the Fund held a collective 23.2% weighting. This means that our portfolio
of high conviction, individually researched equities had less concentration across its top 6 holdings than the S&P
500 Index!
The concentration risk we are highlighting does not confer specific concerns for the six megacap businesses that
find themselves sitting atop the S&P 500 (and perhaps sitting atop the equity universe). To the contrary, these are
amazingly successful businesses, and every reader of this letter is likely a customer of these companies. But might
the extent to which investors are crowding into a narrow subset of securities at least be an impetus for investors
to reallocate their portfolios? In 2010, the top five securities by market cap were Exxon, Apple, Microsoft, IBM, and
Chevron (GE was number nine!). 3 In the ten+ years that have followed, three of these securities (Exxon, IBM and
Chevron) have dramatically under-performed broader equity indices, while GE subsequently experienced an 80%
price decline. Size does not beget performance - just as no tree grows to the sky – and size may not be a barometer
for safety. Of course, history only rhymes.
In our last letter we briefly touched on the topic of risk through the lens of standard deviation. This month, we
discuss risk from the perspective of position sizing and portfolio concentration. While the broad market indices
continue to rise, the team at Changebridge believes investors would be wise to keep these risk factors in mind
while allocating capital. Howard Marks is known for saying “You can’t predict, you can prepare.” While today’s
investors (broadly) may not worry about the S&P 500’s security concentration levels, and we are not inclined to
prognosticate market crashes, we nonetheless believe it is prudent to assess concentration and exposure
evolutions within your portfolio, especially after markets rise on the backs of a select few securities.
Contributors & Detractors:
As we do each month, we would like to highlight securities that meaningfully impacted performance in each of the
two strategies. We believe investors deserve transparency into performance drivers as well as changes in our
investment thesis, so we have highlighted contributors and detractors amongst the following categories: securities
owned in the funds (long positions) which were amongst the top three contributors/detractors in CBSE, the top
three long contributors/detractors in CBLS, and the top three contributors/detractors in CBLS amongst securities
sold short (short positions).
With a heightened preference for portfolio transparency, we also provide a comprehensive portfolio attribution by
security for the month of July in the appendix.
Top long contributors (CBSE and CBLS)
Civeo Corp (CVEO) provides remote site lodging accommodations for the natural resources industry. Their
customers are predominantly located in Canada, Australia, and the US in order of size. As commodity prices have
risen since the summer of ’20, many of CVEO’s customers have experienced improved profitability. This generally
leads to additional exploration and hiring of employees. However, due to social distancing restrictions in Australia
and Canada, CVEO has been unable to fully realize the benefits associated with increased demand for their
customers’ products. Until recently! In the past few weeks, we have seen a loosening of restrictions, likely allowing
tenants to return to CVEO’s facilities. We believe demand for accommodations is likely to exceed supply, and CVEO
will benefit from expanding facilities and improved pricing. The fundamental setup seems favorable, for a stock
2
https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-brochure.pdf
3
https://www.youtube.com/watch?v=kfMFDcuDKYA&ab_channel=chichaelmohalready trading at a free cash flow yield above 25%, by our estimates. From a sustainability perspective, CVEO has invested in water conservation, wastewater treatment, and utilizing solar to reduce electricity usage at their sites. We think we have identified an inexpensive stock with several catalysts for growth and we have established a position in CVEO in each of the funds. In their most recently reported quarter, CVEO began to show signs that the reopening thesis we had laid out was coming to fruition, especially in Canada, and the stock was a meaningful contributor to performance. LCI Industries (LCII) is a manufacturer of recreational vehicle and boating equipment. Their broad suite of products runs the gamut for OEM’s (original equipment manufacturers). This puts LCII in the enviable position of acquiring other parts manufacturers, integrating them with cost synergies, and selling these parts into an existing customer base. This acquisitive mindset amongst a tenured management team has served LCII well for decades. While the markets for RV’s and boats have historically been cyclical in nature, consolidation among both OEM’s as well as dealers has enabled the industry to practice improved inventory management. The last year proved to be a stellar period for outdoor equipment in general and LCII in particular, as their scale enabled them to supply the rapidly growing demand. Two months ago, we discussed a prevailing concern that the limited duration of the RV cycle could cause the stock price to decline. We believed these concerns to be transitory in nature and continue to view LCII as a best-in-class operator end markets with long-term growth prospects. This month, those cyclical fears seem to have receded as the stock price largely recovered from its prior month’s declines. Top long contributor (CBLS only) ASML Holding (ASML) is a designer and developer of semiconductor manufacturing equipment. To be more specific, ASML is the world’s leading supplier of lithography equipment to semiconductor manufacturers, as well as the world’s key supplier of next-generation EUV (extreme ultraviolet) imaging technology. In a world that grows increasingly reliant on semiconductors by the day – current chip shortages are impacting everything from automobile manufacturing to refrigerators – we believe this to be an enviable position. Effectively, our analysis suggests ASML to be the sole supplier globally to an industry that is growing in demand, has very high visibility, and is currently in a shortage. In the most recent quarter, ASML reported earnings and revenue that exceeded estimates. With regards to the aforementioned EUV devices, orders were up 114% QoQ (quarter over quarter), and the company is working on expanding capacity to build more of these devices. As market participants begin to anticipate global chip capacity constraints pushing out until ‘22/’23, we believe it likely that the favrorable supply/demand dynamics persist. Top long contributor (CBSE only) SCI Corp (SCI) is a provider of death care services. The company operates funeral service locations, cemeteries, and crematoria, in addition to prearranged funeral services. In a highly regulated market for death care, SCI has evolved into the largest provider in the United States. The business model may sound quite simple on the surface, but this is a much more complicated business model than meets the eye. Given the emotional nature of their sales, SCI is highly regulated in terms of how they structure their prearranged funeral and cemetery services. They also generate a meaningful amount of cash in preneed sales, so their ability to manage that capital is quite relevant. In the last year, while death rates were impacted by Covid-19, the ability to gather in large groups was meaningfully hampered, thus negatively impacting funeral services. SCI has proven quite adept at acquiring smaller operators and integrating them in a financially and socially responsible manner. In the last quarter, they reported revenue and earnings above expectations, and showed an accelerating growth rate as social distancing restrictions lifted. Market participants largely approved of these results, and we would certainly concur. Top long detractors (CBSE and CBLS) Crispr Therapeutics AG (CRSP) is a biotechnology company developing gene editing solutions for a variety of diseases. Their leading candidates are currently for rare diseases beta thalassemia and sickle cell disease, where patient data appears strong thus far. In oncology, their B-cell malignancy study is also off to a positive start in a
Phase 1 trial, and the company has recently announced a partnership with ViaCyte around solutions for Type 1 Diabetes. While admittedly difficult to evaluate the stock price on the basis of near-term financials, the potential for an immensely innovative / platform company to potentially revolutionize aspects of healthcare, combined with the preponderance of evidence suggesting they are making progress provides a highly asymmetrical risk/reward opportunity for shareholders. A few months ago, peer Intellia Therapeutics reported impressive top line results in a (gene-editing) clinical trial, driving optimism into the sector broadly. While we continue to believe that CRSP has among the broadest suites of gene editing solutions, minor sentiment shifts can have a meaningful impact on stock prices when we don’t have current financials to rely on. We would contend that the current valuation fails to reflect the potential of CRSP as a platform company, rather than a legacy biotech. With a best-in-class management team and scientific leadership, we believe CRSP is well positioned to have a meaningful impact on both our portfolio and society at large. Criteo SA (CRTO) is a global marketing technology company undergoing a significant business transformation. After bringing in a new management team, headlined by Megan Clarken (CEO) and Sarah Glickmann (CFO), CRTO is transitioning its legacy business into an emerging advertising model for retailers. While the legacy business was focused on “ad retargeting” (the practice of strategically placing advertisements for products that users recently viewed) CRTO’s emerging business helps e-commerce platforms better monetize their own digital real estate. Amazon was the first mover in this space, possessing the size and scale to leverage customer data to offer advertisements within its retail platform. Criteo engages with businesses that lack the scale to create their own advertising platform, yet they have an untapped opportunity to monetize their platform. Criteo brings years of experience and proven success, with this new business growing 40% annually, now comprising 25% of overall firm revenues. We believe this new business segment (as a standalone) might be worth more than the market value of the entire company today. While the legacy business is in decline, it generates meaningful free cash flow, and investors seem to be getting that for a compelling valuation on a sum of the parts basis. During July, CRTO reported what we believed to be an impressive quarter, beating expectations, and continuing to grow their newer retail media business in excess of 40% annually. Legacy retargeting revenue appears to have stabilized for now, and CRTO is poised to show organic overall revenue growth for the first time in 3 years. Market participants seem to be hitting the pause button after the stock returned in excess of 150% in the previous twelve month period. Top long detractor (CBLS only) Scientific Games (SGMS) is a manufacturer and software provider for the gaming industry. Their segments include digital gaming operations software, an app-based gaming platform, operational services for state-run lotteries, and parimutuel machine production. Their legacy machine business was clearly impacted – cut nearly in half – by covid- induced lockdowns as traffic to casinos largely halted beginning in March of 2020. The state-run lottery business, despite requiring in-person interactions, showed impressive resilience, posting revenue growth of 1% in ’20. Their 82% equity stake in Sciplay (SCPL) appreciated meaningfully as Americans have largely identified new forms of entertainment and social engagement. SGMS’ digital segment is worthy of closer inspection. This segment powers much of the back-office for digital gaming platforms, such as Fanduel, Flutter, Wynn, Fox, Golden Nugget, and more. By our estimation, the business powers approximately half of all digital gaming interactions in the US. Their relationship with customers is quite strong, and the business has a meaningful barrier to entry given that they are integrated in key customer interactions on these platforms. Given that the US digital gaming market is in the early innings of what appears to be an improving regulatory landscape, we believe SGMS provides a valuable service. Despite reporting what we believed to be an impressive quarter, SGMS was likely caught up in a broader small cap reversal in the month of July. Effectively, we have witnessed broad profit taking within the small cap securities that have outperformed in the last year. Top long detractor (CBSE only) Alibaba Group Holding (BABA) is a Chinese conglomerate, with business lines including e-commerce, banking, internet infrastructure, and advertising. Their core business since inception has been e-commerce, and they
operate the largest platforms in China, Taobao and Tmall. They also operate large and growing logistics services including Lazada (Southeast Asia), Cainiao, and AliExpress (Europe), in addition to cloud computing services (think AWS or Azure) and own a meaningful stake in Ant Financial, a leading payment processor in China. Given the scope of these businesses, the above description is an oversimplification. While we believe a variety of different valuation methods would lead us to meaningful potential upside, BABA has been negatively impacted by the risk of detrimental regulation in China. In the last few months, concerns have begun to emerge around blowback for comments made by BABA’s founder, Jack Ma. More recently, new regulations emerged that may hamper the operating model of both Ant Financial and BABA’s core e-commerce business. With limited visibility around the regulatory landscape, many investors have sought out protection or sold their position in many Chinese securities outright. Your managers are included among that group. While we believe prior conditions would have created an opportunity for meaningful alpha generation, those conditions appear to be much less likely than just a few months ago. Top short contributors (CBLS only) Smith & Wesson (SWBI) is a manufacturer of firearms. After struggling to turnover dealer inventory for a number of years, the company was offered a perfect storm for demand in 2020: Covid-19 and the resulting stimulus checks and fear of the unknown, as well as a Democrat-controlled White House and Congress. When Democrats are elected, the gun enthusiast community tends to anticipate future gun restrictions and purchases in advance of any new regulations. Both of these unique circumstances gave SWBI an opportunity to clean up inventory and reset the slate for future products. In reporting their calendar year Q1 earnings, SWBI demonstrated the strength of this demand recovery, by reporting an impressive beat-and-raise quarter. However, looking forward, the setup into 2H ’21 and ’22 appears difficult. With demand pulled forward into ’20 and 1H ’21, we believe it likely that gun sales retreat, following a consistent pattern with prior Democrat-held election outcomes, and recent channel checks have reflected such a deceleration. While valuations are not demanding on a relative basis to the S&P 500, operating margin expectations appear optimistic, especially in light of the potential tail risk of new regulations permanently hampering gun sales; and valuations relative to the company’s own history are beyond normal ranges. In July, background checks for gun purchases declined 21% YOY, helping to bring SWBI stock back from its previous (perhaps reddit-driven) highs. Fastly (FSLY) is a CDN (Content Delivery Manager) that provides internet infrastructure services. The company powers the back-end for many of the most popular websites on the internet. While there is a large runway for growth, this is a hyper-competitive space with generally declining pricing power. For instance, Cloudflare (NET) offers a competing service at a lower price and is able to do so with more POP’s (Points of Presence). More POP’s correlate with faster delivery speeds. While Cloudflare was not necessarily known as an enterprise provider, they did enter the enterprise market in 2018 and are growing faster than FSLY, with less customer concentration than FSLY. Further FSLY acquired Signal Sciences in October ’20, likely boosting ’21 revenue. This acquisition laps in a few months, which could result in further revenue deceleration. Despite intense competition and slowing growth, FSLY trades at >15x ’21 revenue estimates, leaving room for multiple contraction. Despite reporting mixed Q1 numbers, and selling off meaningfully, FSLY had rallied in May alongside a broad market rally. We saw this as an opportunity to revisit a business model that we believe to have tremendous competitive pressure, at a higher valuation than when we had previously covered our position. Since then, concerns around a temporary outage among FSLY customers have emerged. In a highly competitive market, both in terms of performance and price, any hiccup can prove highly impactful. Novavax Inc (NVAX) is a developer of vaccines for infectious diseases, such as influenza and Covid-19. Prior to Covid-19, NVAX had spent the last decade attempting to bring a flu vaccine through the FDA process, and then to market. In Q4 ‘19, they had published phase 3 data for their flu shot that appeared promising, however after years of development, the addressable market was limited to individuals aged 65+. Further, while their data was impressive, Sanofi had also updated its flu vaccine to show improved efficacy levels as well. In our opinion, this rendered NVAX’s feat somewhat less impactful. The onset of Covid-19 provided NVAX a tremendous opportunity to provide a potential solution to the global pandemic. NVAX has developed a Covid-19 vaccine with impressive efficacy data in existing studies, and it is hopeful to be on the market in late 2021. While impressive, they will be
at best the 6th vaccine to hit the market, with vaccination rates in the US slowing, and a meaningful head start for PFE, MRNA, JNJ and AZN globally. By our rough estimates, when the NVAX drug comes to market, about 20% of the world’s population will have already been vaccinated. We find it difficult to assume more than 50% of the global population eventually receives a vaccination, and even more unlikely that as we approach that 50% threshold the pricing for vaccinations will remain at current levels. Additionally, NVAX has already indicated difficult in attaining the necessary raw materials to manufacture highly sensitive vaccinations. They are hardly alone in this predicament. With Wall Street estimates meaningfully higher than our internal models, and a valuation suggesting vaccinations and boosters continue for many years to come, we believe the risk/reward to be asymmetrically skewed to the downside. Top short detractors (CBLS only) Universal Display (OLED) is a manufacturer of components for OLED (organic light emitting diode) displays and lighting. The company owns valuable intellectual property and earns license and royalty fees in addition to revenue from the materials they produce and sell to manufacturers of display and lighting equipment. The hope for OLED TV’s and phones has been building for many years, and the progress thus far has failed to meet initial expectations, however, there has been recent progress in the industry, largely lifting valuations for those who service TV/phone manufacturers. The key impediment has been a lack of fabrication plants that can produce OLED screens. As this impediment seems to be gradually resolving, a new competitive force has entered the market: Samsung. As they are one of the largest customers for OLED, it is a bit of a complicated situation. Samsung has developed their own next-generation display technology, and frankly, the verdict is out on which will prevail. Valuation and expectations for OLED are not likely taking into consideration the possibility for a competing technology, or the potential for one of OLED’s largest customers to seek in-house display solutions. Dish Network Corp (DISH) provides a direct broadcast satellite subscription television and audio service throughout the United States. Their core business, satellite television subscriptions, has been in decline for years, and shows no signs of rebounding. They have undertaken new investments in an effort to diversify away from the legacy satellite television service, such as an ambitious nationwide 5G project, and the acquisition of Boost Mobile. While we cannot rule out the potential success of DISH’s new ventures, we believe they will require a tremendous buildout expense and may take years to reach fruition. AT&T recently agreed to sell its DirecTV business (a direct competitor to DISH) at an estimated enterprise value of $16.25b, far below the $67b that AT&T paid for the business in 2015, one proxy for the headwinds facing the category in recent years. Earlier this year, DISH announced a partnership with Amazon’s AWS to power its 5G efforts – a similar agreement to that of Verizon and AWS. Market participants viewed this as a validation of DISH’s 5G efforts and the stock rallied in the month. July was a fairly uneventful month for DISH as investors awaited their Q2 earnings report. New Positions: Positions established and held through the month of July include: New long positions (CBSE and CBLS) ModivCare (MODV) is provider of a suite of solutions for healthcare payors and their patients. Their transportation segment, known as Logisticare, provides non-emergency transportation for people in home and community-based settings to receive healthcare. They also provide workforce development and rehab services and have recently moved aggressively into offering meal delivery as well. Seeing the potential synergies between transportation services for a variety of offerings, MODV has been acquiring several ancillary services to provide holistic support for a generally aging population. They also own a stake in Matrix, which provides health assessments for Medicare Advantage plans. This business is not consolidated on the income statement, and we believe it may potentially be worth up to 30-40% of the entire value of MODV. MODV does not control Matrix but owns over 40% of a business we believe may be worth over $4B. While there is no news of a liquidation event, it has been 6 years since the majority holders purchased their stake, suggesting some sort of transaction may be possible in the next few years. We believe this is a business that serves a vulnerable population and does so with meaningful regulatory oversight. We estimate the core business to trade at approximately 12x EV/EBITDA (Enterprise value to earnings before
interest, taxes and depreciation) with long term demographic growth tailwinds and potential upside from any Matrix monetization. Edgewell Personal Care (EPC) is a manufacturer and distributor of shaving, skin care, sun protection, and feminine care products. Historically, their shaving segment was their largest and most profitable business line, however in the last few years, competition has proven incredibly tough. With the entrance of Dollar Shave Club and Harry’s, brands like Schick lost meaningful share for several years, reducing EPC’s revenue and earnings significantly in that time. More recently, their shaving segment has stabilized and held market share in recent quarters. They have made a number of acquisitions to shift further into skin care and grooming, while divesting low growth infant care product lines. The segment we are most interested in is sun care. With the Banana Boat and Hawaiian Tropics brand showing consistent growth for years (other than during covid-19 lockdowns) we believe this is an underappreciated business that is poised to show improving organic growth in the near term. As we recover from last year’s lockdowns, more Americans have embraced safe travel and time spent outdoors, which should correlate closely with sunscreen usage. Further, in July, Johnson and Johnson recalled select Aveeno and Neutrogena sunscreens, temporarily removing two competitors during the peak summer season. At less than 8x EV/EBITDA, with the strongest growth prospects in years, we believe this to be a unique opportunity. New short positions (CBLS only) AMC Entertainment (AMC) is a provider of theatrical exhibition, movie screening, and food distribution at its theaters. This chain of movie theaters has been the source of much media attention as the stock has experienced a roller coaster of sorts over the last year and a half. From the verge of bankruptcy in December/January 2020/2021 to a $45B enterprise value in June 2021, investors would be hard pressed to find a faster and more extreme reversal of fortunes. Despite becoming a retail darling, and wisely raising capital at opportune times to keep the business afloat, AMC remains a theater chain in a world that is quickly moving towards digital movie releases and tighter theatrical windows. Investors may recall that we previously owned CNK and IMAX, believing the box office window provides some economic value to the studios. Where valuation was a consideration in our relatively bullish positioning, even prior to Covid-19, revenue per theater oscillated between years of declines and stabilization, largely based on the slate of movie releases. Gross margins were stable, but operating margins were declining, and debt was piling up at AMC. As we entered 2020, the company had $235m in operating income and $340m in interest expense, hardly a recipe for solvency. Fast forward to today, and the situation appears to have worsened. Disney, a leading film studio, has embraced offering its movies direct to consumers on its Disney Plus platform; Warner Brothers has followed suit, and the trend of direct to streaming and/or short theatrical windows seems intact. It remains to be seen what the world of studios and theatrical releases will look like in a post-Covid environment, but we find it difficult to imagine improved conditions for theater exhibitors. Nonetheless, AMC is trading at more than 20x the market cap it had prior to Covid-19. We believe a reasonably optimistic view would suggest that AMC might warrant an EV/EBITDA of 8-10x. At 10x 2018 EBITDA (pre-Covid levels), AMC would trade at an enterprise value of $8.7B, which does not even surpass the levels of current debt and operating leases on the balance sheet today. It is worth acknowledging the team at AMC has opportunistically raised capital at elevated stock prices and remains solvent, and we will certainly watch the situation closely for signs of an improving exhibitor backdrop, but we think the business is fundamentally challenged and exhibits an impaired capital structure. GameStop Corporation (GME) operates specialty video game entertainment stores. By now, most readers are aware of the drama surrounding GME shares in the last 12 months. The business model has gradually become more obsolete as video game platforms distribute their offerings digitally, not through brick-and-mortar stores. GameStop’s annual sales ending in the period of February 2020 were lower than they were for the same period in 2008. That said, markets can sometimes ignore such fundamentals, moving stock prices based on technical factors, momentum, or even commentary found on social news aggregation websites. In January, GameStop likely experienced a combination of a “short squeeze” and a “gamma squeeze” which drove share prices from around $19 to a high of $480, a nearly 25-fold increase in weeks. A short squeeze occurs when price appreciation forces short sellers to abandon their positions. Changebridge discusses the merits and mechanics of Short Selling in a recently released research piece linked here and in this podcast with Valuewalk. As we have had time to absorb the stock price gyrations and assess the changes in management team and potentially business model, we struggle to accept the narrative that GME can transition successfully into an e-commerce/digital model. Our simplistic view
of the gaming supply chain is the transition from physical games to digital is underway, and with that, direct distribution from the software provider to the consumer. They have cut out the middleman (retailer). There remains a portion of the population who prefer to purchase physical games, and the game-makers have retained those customers through distributors like GameStop. But we ask ourselves: what incentive is there for the game manufacturers to distribute digitally through GameStop when they can go direct to their consumers at higher margins? If the upside scenario for GameStop was to convert all physical sales into digital sales and summarily ascribe a multiple to the stock on par with that of Wayfair (a purely digital retailer of household furnishings) then amidst that successful transition the company would trade at 1.8x EV/’22 revenue (Wayfair’s multiple). The problem is, GME is already trading at 2.2x ’22 EV/revenue – with very little assurance that they can successfully navigate such a business transformation. Dave & Buster’s Entertainment (PLAY) is an operator of venues that combine dining and entertainment. Effectively, they offer meals, drinks, and arcade-style games. Covid-19 has unquestionably been a headwind for this in-person business model that involves high volumes of customers interacting with classic arcade games and dining at Dave & Buster’s facilities. The model doesn’t lend itself to food delivery platforms, as customers largely come for the experience, and the in-person experience is where PLAY earns both its highest gross margins and historically 2/3 of its gross profit. Even if they could transition completely to a food-delivery model, it would mean losing 2/3 of their gross profit. Fortunately for PLAY, there has been a broad resumption of pre-Covid normalized activity and customers have begun to go back to Dave & Buster’s. However, prior to Covid-19, same store sales had declined for 3 straight years, and operating margins and operating income was also in decline. Coming out of Covid-19, we find it likely that some percentage of prior PLAY customers will no longer be comfortable returning the venues – perhaps for several years, perhaps forever. For a business that has revenue expectations in ’22 (calendar year) that are 13% higher than ’19, we believe there is excess optimism baked into estimates. Further, operating margins are expected to be consistent with pre-Covid levels. Given recent increases in minimum wage and difficulties in hiring (broadly) we believe it unlikely that PLAY can maintain its prior operating margin levels. In 2019, wages made up 24% of PLAY’s revenues. Unless they can improve same store sales, it seems unlikely that they can show operating margin improvement in this environment. Please feel free to reach out to us via our website, www.changebridgefunds.com, follow us on LinkedIn (Changebridge Capital), and on Twitter (@changebridgecap). Thanks for your trust,
Appendix A: Holdings and Attribution for CBSE (7/1/21 - 7/31/21) Name Beginning Weight % Ending Weight % Average Weight % Contribution % CBSE (NAV) 100.00 100.00 100.00 -2.92 CIVEO CORP 3.15 4.46 3.64 0.69 SERVICE CORP INT 2.33 2.02 2.47 0.39 LCI INDUSTRIES 2.36 2.70 2.51 0.27 ASML HOLDING-NY 2.16 2.47 2.27 0.24 SKYLINE CHAMPION 3.89 4.24 3.99 0.24 SONY GROUP-ADR 2.81 3.10 2.99 0.20 SEMLER SCIENTIFI 2.99 3.26 3.28 0.15 H&R BLOCK INC 2.85 3.06 2.97 0.13 CHESAPEAKE ENERG 2.84 3.05 2.99 0.12 ICF INTERNATIONA 2.62 2.82 2.75 0.11 FIRST REPUBLIC B 2.58 2.77 2.74 0.11 ESTEE LAUDER 2.02 2.19 2.10 0.10 US Dollar Spot 5.83 6.39 5.69 0.00 PLANET FITNESS-A 2.53 2.61 2.55 0.00 SPROUT SOCIAL-A 2.09 2.13 2.12 -0.01 BRIGHTVIEW HOLDI 3.00 3.08 3.02 -0.02 MODIVCARE INC 2.33 1.36 -0.02 EDGEWELL PERSONA 1.95 0.98 -0.02 CVS HEALTH CORP 3.34 3.39 3.37 -0.02 LIBERTY LATI-C 2.73 2.76 2.76 -0.05 SHARPS COMPLIANC 1.84 2.84 1.78 -0.05 EXPEDIA GROUP IN 3.53 3.58 3.59 -0.06 TAIWAN SEMIC-ADR 2.42 2.42 2.43 -0.07 PROGYNY INC 2.67 2.59 2.65 -0.15 LUXFER HOLDINGS 2.68 2.59 2.61 -0.16 THRYV HOLDINGS I 3.11 2.98 2.90 -0.21 MAGNITE INC 2.14 1.98 2.05 -0.22 CINEMARK HOLDING 1.26 0.49 -0.25 SOLARIS OIL IN-A 2.57 2.36 2.49 -0.28 STERLING CONSTRU 3.41 3.20 3.20 -0.30 IMAX CORP 2.23 0.88 -0.32 QUIPT HOME MEDIC 2.92 2.81 2.90 -0.36 SCIENTIFIC GAMES 2.18 1.79 1.95 -0.44 TRANSMEDICS GROU 3.44 3.05 3.34 -0.48 ALIBABA GRP-ADR 3.01 2.47 -0.55 CRITEO SA-ADR 4.82 4.26 4.63 -0.69 CRISPR THERAPEUT 3.63 2.80 3.09 -0.92 Performance data represents past performance and is no guarantee of and not indicative of future results. Total return and value will vary, and you may have a gain or loss when shares are sold. Current performance may be lower or higher than quoted. The net asset value "NAV" calculation for fund performance and security attribution reflects unaudited estimates from the Fund's administrator and calculations by Bloomberg's Performance Attribution Model. Returns include changes in share price and reinvestment of dividends and capital gains, if any. Please go to https://changebridgefunds.com/sustainable-equity-cbse/ for full month-end and quarter-end performance. The Fund's inception date is 11/13/2020.
Appendix B: Holdings and Attribution for CBLS (7/1/21 - 7/31/21) Name Beginning Weight % Ending Weight % Average Weight % Contribution % CBLS (NAV) 100.00 100.00 100.00 -0.91 CIVEO CORP 3.28 4.55 3.75 0.72 SMITH & WESSON B -3.22 -1.05 -1.29 0.46 FASTLY INC -CL A -2.28 -1.86 -2.04 0.44 NOVAVAX INC -2.22 -1.70 -2.08 0.34 BEYOND MEAT INC -1.38 -1.09 -1.20 0.30 LCI INDUSTRIES 2.50 2.80 2.62 0.28 ASML HOLDING-NY 2.40 2.70 2.50 0.27 SKYLINE CHAMPION 4.10 4.38 4.15 0.25 SONY GROUP-ADR 3.21 3.48 3.38 0.23 LOGITECH INTER-R -2.11 -1.92 -2.12 0.21 TRANSACT TECH 0.94 1.15 0.95 0.20 ROKU INC -2.79 -2.03 -2.22 0.19 SEMLER SCIENTIFI 3.29 3.51 3.55 0.17 KAR AUCTION SERV -2.50 -2.37 -2.40 0.15 H&R BLOCK INC 3.10 3.27 3.19 0.14 AMC ENTERTAINMEN -0.58 -0.42 0.14 CHESAPEAKE ENERG 2.96 3.11 3.08 0.13 ICF INTERNATIONA 2.89 3.05 3.00 0.12 GAMESTOP CORP-A -0.63 -0.48 0.12 CARTER'S INC -2.17 -2.08 -2.14 0.11 FIRST REPUBLIC B 2.65 2.79 2.77 0.11 IBM -2.84 -2.76 -2.77 0.11 DAVE & BUSTER'S -1.88 -0.10 0.08 CAMPBELL SOUP CO -1.87 -1.82 -1.88 0.06 HORMEL FOODS CRP -1.67 -1.64 -1.68 0.04 PLUG POWER INC -0.18 -0.14 -0.15 0.04 PLANET FITNESS-A 2.69 2.72 2.67 0.00 US Dollar Spot 33.33 31.25 31.87 0.00 DOORDASH INC-A -2.65 0.00 -2.16 0.00 DISH NETWORK-A -2.74 -2.78 -2.74 -0.01 SPROUT SOCIAL-A 2.31 2.33 2.33 -0.01 BRIGHTVIEW HOLDI 3.23 3.25 3.22 -0.02 MODIVCARE INC 2.31 1.35 -0.02 EDGEWELL PERSONA 1.95 0.99 -0.02 CVS HEALTH CORP 3.33 3.33 3.32 -0.02 LIBERTY LATI-C 2.99 2.96 2.98 -0.05 SHARPS COMPLIANC 1.92 2.89 1.84 -0.06 EXPEDIA GROUP IN 3.79 3.77 3.81 -0.06 TAIWAN SEMIC-ADR 2.66 2.62 2.65 -0.08 FLUTTER ENT-ADR 2.26 2.17 2.23 -0.11 UNIVERSAL DISPLA -2.10 -2.25 -2.07 -0.12 PROGYNY INC 2.51 2.40 2.47 -0.14 LUXFER HOLDINGS 2.93 2.77 2.82 -0.17 THRYV HOLDINGS I 3.22 3.02 2.97 -0.22 MAGNITE INC 2.27 2.05 2.15 -0.23 CINEMARK HOLDING 1.38 0.53 -0.27 SOLARIS OIL IN-A 2.74 2.47 2.63 -0.29 IMAX CORP 2.35 0.92 -0.33 STERLING CONSTRU 3.78 3.48 3.50 -0.34 QUIPT HOME MEDIC 2.97 2.81 2.92 -0.37 ALIBABA GRP-ADR 2.80 0.00 2.26 -0.51 TRANSMEDICS GROU 3.67 3.19 3.51 -0.51 SCIENTIFIC GAMES 3.61 2.91 3.18 -0.73 CRITEO SA-ADR 5.23 4.54 4.97 -0.75 CRISPR THERAPEUT 3.43 2.60 2.89 -0.87 Performance data represents past performance and is no guarantee of and not indicative of future results. Total return and value will vary, and you may have a gain or loss when shares are sold. Current performance may be lower or higher than quoted. The net asset value "NAV" calculation for fund performance and security attribution reflects unaudited estimates from the Fund's administrator and calculations by Bloomberg's Performance Attribution Model. Returns include changes in share price and reinvestment of dividends and capital gains, if any. Please go to https://changebridgefunds.com/long-short-equity-cbls/ for full month-end and quarter-end performance. The Fund's inception date is 11/13/2020.
CHANGEBRIDGE CAPITAL, LLC Investors should consider the investment objectives, risks, charges, and
expenses of the funds carefully before investing. This and other information
180 Canal Street, Suite 600 are contained in the Fund’s prospectus, which may be obtained by visiting
www.changebridgefunds. com or by calling 617-717-2912. Please read the
Boston, MA 02114 prospectus carefully before you invest.
info@changebridgecapital.com Investing involves risk. Principal loss is possible. As an ETF, the funds may trade
www.changebridgefunds.com at a premium or discount to NAV. Shares of any ETF are bought and sold at
market price (not NAV) and are not individually redeemed from the Fund.
(617) 717-2910 Market Returns are based upon the midpoint of the bid/ask spread at 4:00
p.m. Eastern Time, when the NAV is normally calculated for ETFs. Your return
may differ if you trade shares at other times. The equity securities held in the
Funds’ portfolio may experience sudden, unpredictable drops in value or long
periods of decline in value. This may occur because of factors that affect
securities markets generally or factors affecting specific issuers, industries, or
sectors in which the Funds invest. The Funds are considered to be non-
diversified, which means that they may invest more of their assets in the
securities of a single issuer or a smaller number of issuers than if they were
diversified funds. As a result, the Funds may be more exposed to the risks
associated with and developments affecting an individual issuer or a smaller
number of issuers than funds that invest more widely. This may increase the
Funds’ volatility and cause the performance of a relatively smaller number of
issuers to have a greater impact on Fund performance.
Applying ESG criteria to the investment process may exclude securities of
certain issuers for non-investment reasons and therefore the Funds may forgo
some market opportunities available to funds that do not use ESG criteria.
Short selling is an investment strategy utilized in CBLS, which involves the sale
of securities borrowed from a third party. The short seller profits if the borrowed
security’s price declines. If a shorted security increases in value, a higher price
must be paid to buy the stock back to cover the short sale, resulting in a loss.
The Fund may incur expenses related to short selling, including compensation,
interest or dividends, and transaction costs payable to the security lender,
whether the price of the shorted security increases or decreases. The amount
the Fund could lose on a short sale is theoretically unlimited. Short selling also
involves counterparty risk – the risk associated with the third-party ceasing
operations or failing to sell the security back.
The Funds are new with a limited operating history.
The Changebridge ETFs are Distributed by Foreside Fund Services, LLC.You can also read
