Caldwell seeks out managers who can generate superior risk-adjusted returns and Holm achieves this through superior information and trading acumen in transportation equities. Chattanooga is the epicentre of US transportation: a physical and figurative hub of activity, intelligence, established family businesses and vibrant venture capital investing. Holm had a brief spell working at media and Software as a Service (SaaS) company FreightWaves, dubbed “the Bloomberg of transportation”, which provides valuable intelligence on freight and has developed dedicated SONAR software. “I got to know many public and private companies in this 10 trillion-dollar industry making up 12% of global GDP but was keen to return to my first love of investing,” points out Holm.

Holm, a “son of the South” who grew up in Memphis, Tennessee, began his career researching and allocating to long/short equity managers at ultra-high net worth wealth adviser, Edge Capital, in Atlanta, Georgia. Holm admits that he learnt a lot directly from his old boss, Joe Mathias, and indirectly from Tom Claugus, whose firm GMT has spawned several other spin out funds, including long/short equity fund Concourse, where Holm and West Brow co-founder Todd Koffman earlier worked together. Concourse’s assets grew but the firm’s value bias was not always in favour with markets, and Holm has since learned how to moderate style exposures in his own investing.

Transportation

The Dow Jones Transportation Average of 20 stocks is often quoted as a kind of leading indicator, but the transportation sector is a far more diverse and intricate tapestry of sub-sectors, industrial and regional cycles, and mini cycles that may last weeks, months or even years. Ocean shipping alone can be subdivided into at least seven sub-sectors, which have different cycles. In 2022 and 2023 Holm was heavily short container shipping and only lightened it up because Red Sea disruptions have temporarily boosted the segment, though he expects the strength could quickly diminish if there is an Israel/Gaza ceasefire. Meanwhile dry bulk has been booming. “These dynamic and volatile cycles are ideal for long/short equity. The transportation space contains at least 350 listed global companies,” says Holm, who has invested in Europe, the UK, Norway, Japan and Australia and has been more active on the short side in China.

Holm essentially focuses on the “old economy” sectors – shipping, trucks, logistics, freight brokers, planes, autos, auto suppliers and dealers and rail – while Koffman, a seasoned sell-side analyst, handles more “new economy” tech sectors, such as electric vehicles, autonomous vehicles, batteries, charging, LIDAR, green energy, and associated raw materials such as lithium or new fuel sources.

Holm seeks out some longer-term secular growth stories in segments such as less than truckload (LTL), rail or parcels, as well as nascent disruptive technology leaders, but has a real talent for reading and trading shorter term cycles. His extensive network, along with alternative data, feeds into a web of mosaic style analysis and proprietary modelling that leads to non-consensus views informing stock selection.

European deep value exposure

Holm may wax lyrical about the Tennessee lifestyle, but he is not sentimentally wedded to investing in local firms nor indeed the US market in any way. “US equities are expensive and more competitive, and transport is inherently a global market. Currently, half of the long book is listed in Europe, with market caps ranging from USD 500 million to USD 10 billion. And we earn good dividends,” Holm points out. “We are already experts in European shipping, freight forwarders or airlines,” he adds.

Old school stock picking

Of 60 ocean companies globally, 30 have equity listed in Norway (often with a Bermuda incorporation) and they can trade at 50-75% discounts to US peers. They trade on single digit PE ratios and return double digit percentages of capital through dividends and buybacks. “Since these are not overcrowded trades, they are driven by pure fundamentals rather than momentum or flows. We want to pick stocks how Buffett did in the 1950s and 1960s to do something unique and get a real edge in modern markets dominated by algorithms, passive money, pod shops and multi-managers,” says Holm.

Holm did a value screen on the neglected and hated UK equity market and came up with 25 names. In airlines, West Brow has owned low-cost carriers such as Ryanair, and has recently moved into British Airways, Iberia, Vueling, LEVEL and Aer Lingus owner, IAG. “It can cut costs, double earnings, and resume the dividend for the first time in five years. It trades on a PE ratio of 3,” enthuses Holm. In aviation-related engines, UK-listed Rolls Royce has already generated triple digit percentage returns for West Brow.

Shipping sub-sectors

Shipbuilding takes years, which means there can be gluts and shortages of supply at the same time in different sub-sectors. “Container ships have a massive forward order book with 30% of the newbuild fleet coming on stream. In contrast, tankers and dry bulk have order books that are only 5-10% of the fleet and may even be approaching zero after allowing for depreciation, scrappage and retirements,” says Holm, citing his fundamental analysis.

Yet some shipping names can be interesting despite a strong forward order book. “One Oslo-listed auto shipper, Hoegh Autoliners ASA, has a dividend yield of 35% and has done well from China becoming the largest car exporter. The firm is sitting on net cash, but we have been slicing the position and taking some profits because the sector has a heavy order book, and the closely held stock has a limited free float. We have already made 50-100% of our cost basis in dividends and doubled our cost basis on the share price,” says Holm.

Trucking

Prices are set at the margin, and it only takes a small imbalance between supply and demand to create a large price move in either direction. “US trucking has plenty of demand, but Covid created excess supply. Barriers to entry are very low – no education is needed, and it is easy to get a commercial license and a loan. During Covid there were two or three banner years when truckers, the second most popular US job after nurses, could make USD 200,000 to USD 300,000 a year. There has been too much supply,” explains Holm, who expects the 2.5 year trucking recession is now ending, has recently covered shorts and gone heavily net long. He also has a position in Volkswagen subsidiary Traton, a Class A truck maker. “We own the cheapest company at the bottom of the cycle,” says Holm.

Autos

Holm did very well out of Ferrari, which has been a fifty bagger from the start. Now he sees recovery and turnaround potential in UK-listed Aston Martin Lagonda. “Ferrari was not always the best company it is today, and AML’s brand is a notch or two below Ferrari, but trades at a huge discount on around 1 times sales and 5 times EBITDA, and can improve with love and attention,” says Holm, who has taken heart from AML’s debt refinancing and has confidence in Executive Chairman, Lawrence Stroll, who boasts a track record of spectacular turnarounds at Tommy Hilfiger and Michael Kors. Holm is also impressed by the revamped product mix including special models, scope for personalization to further enhance margins and Aston Martin Formula 1 racing exposure, which is also helpful in building the brand.

AML is a large new position and elsewhere in autos, Holm owns a more traditional value play: “Mercedes is also a long, paying an 8% dividend and sitting on USD 30 billion of net cash, as it transitions the auto mix to higher average selling prices”.

FLNG

Floating liquefied natural gas (FLNG) has become a bigger industry due to US net exports and sanctions on Russia. Golar LNG is an example of strong cashflows limiting downside and has at least two very strong catalysts. “FLNG Hilli, which is sought after for stranded gas assets, could be redeployed at much higher prices upon renewal, and Golar eyes a potential FID (final investment decision) or a new contract for their Mark II (“The Fuji”). The valuation is also underpinned by dividends, buybacks, and indications of takeover interest above the current share price,” says Holm.

High gross, low net

West Brow runs a higher gross exposure of 200-250% and a lower net ranging from 0-40% than Holm’s former firms, which ran 150% gross and 50% net: “A good stock-picker should use more gross leverage and make returns in bull and bear markets. This helps to overcome fees and lowers volatility with more shorts to mute exposure. Even so we expect to have some months up or down by 5% as a maximum target.”

Hit rates and turnover

“We are aiming for net returns of 15-20%, which should be nearly all alpha. Being right 55% of the time may be enough if we can cut losers and getting it right 60% of the time can work with the right sub sectors,” says Holm. Portfolio turnover can be high, and he can easily cut and reverse on a dime: “I really enjoy watching the tape and do find good trading opportunities”. Holm has seen tough climates for shorting and been burned in every way possible for a decade: “We have good risk management on the short side and will cut the position quickly if we need to. We are going to get it wrong sometimes”.

The short book has more positions and higher turnover than the long book, where the top ten holdings can make up half of the 20-30 holdings. The maximum position size is 10% for longs and 3% for shorts.

Style and factor risk

Holm has a natural value bias, but makes a conscious effort to control several factor exposures including size and small/mid cap. Nonetheless the average PE ratio is about 10 and there are strong dividends.

Brokers

West Brow does a great deal of proprietary research, but also does make some selective use of sell-side research. The firm recently moved its prime brokerage to UBS, which has good global coverage of transportation including European names. He also talks to Norway’s Pareto and Clarksons, where his brother works, as well as using research from his former employer, FreightWaves.

ESG

West Brow is not an ESG strategy per se, but it closely monitors ESG trends because regulations around carbon and sulphur can be important for sectors such as shipping, while some sorts of trucking can use electric batteries and hydrogen. “We may invest in renewables if they are really compelling. If an oil tanker has 20-year-old ships that are not compliant, we are careful about the valuation.”

Innovative fee structure

Investors can choose a traditional structure of 1.5% management fee and 20% performance fee, or some larger accounts can opt for an innovative proprietary fee structure that can charge a progressively lower tiered management fee as firm assets grow, as well as a superior risk adjusted performance (SRAP) fee, conceived by Ted Caldwell. The performance fee is based on alpha, relative to net exposure applied to the Russell 1000 equal weight index.

West Brow has outperformed this benchmark by a considerable margin and Holm remains confident of continuing strong risk-adjusted returns from some longer-term stock-picking as well as shorter term trading.