Rogue Funds Q2 2024 Letter to Investors
Ensure you read the disclaimer at the bottom.
Below is the Q2 2024 Letter to Investors. For the PDF version of this letter please visit the Rogue Funds Website or click the “Investor Materials” tab on the substack.
Please ensure you read the disclaimer at the bottom. All returns are unaudited.
This letter is intended for accredited investors.
Q2 2024 Letter to Investors
July 19th, 2024
During the second quarter of 2024, Rogue Funds LLC (the “Fund”) appreciated 1.4% net of fees*. The rate of growth slowed down substantially compared to the pace that we saw in Q4 and Q1. Due to the Fund’s concentration, it will not be unusual to see both large drawbacks and large increases in the overall returns seen throughout the year.
In Q2 we officially finished out our first year of performance and it was a fantastic year that I hope to replicate. The odds we replicate the performance we saw last year on a consistent basis are extremely low but it is a goal we will strive to achieve in a responsible and prudent manner. Our first-year returns were 66.4% net of fees.
Our portfolio turnover has begun to slow down significantly. We added 3 new core holdings that we plan to maintain for the foreseeable future. We currently have a portfolio of stocks that, I believe, all have very large potential for earnings in the coming years. We have only divested one core position recently and have seen a small return in the small but active part of our portfolio.
Seed Fee Structure
Currently, the Fund is offering a seed fee structure utilizing a 10% incentive allocation (compared to a 20% incentive allocation once the seed round ends). We are now only offering the start-up fee structure to individuals investing $500,000 or more for the foreseeable future. All investors who participate in the seed funding are locked into this structure for the entirety of the time that they choose to stay invested in the Fund, including any additional capital. The return for current investors in the Fund, who have participated in the seed funding, is 74.1% since Inception (May 1st, 2023).
Performance and Returns
The 60%+ rate of return was unlikely to continue over the long run (unless of course I turn out to be the single greatest hedge fund manager in history) and this is what we saw in this past quarter. We saw a significant slowdown in Q2, with a small amount of turnover. This turnover should slow down even more as we progress through the year as I solidify our core holdings. Unless we experience a very rapid (and very extreme) appreciation in our underlying investments, beyond what I consider fair value, then our core holdings are unlikely to change in the near future.
Summary of the Fund Performance
We experienced a relatively flat performance for the previous quarter. Some of that stasis is due to neutral Q1 reports that caused slight dips in larger positions and some of it was due to missteps from yours truly. Most Q1 reports for our holdings were neutral and caused some portfolio positions to lag. Another element for the flat performance was due to our option positions depreciating from theta/time decay.
Some of our biggest holdings experienced a delay in revenue recognition which I believe will lead to some significant attention on these portions of the portfolio in Q2 and Q3 reports. I believe our period of “low volatility” will be short lived as our holdings begin to experience numerous catalysts in the back half of the year continuing through early 2025. This could of course be in the positive or negative direction but, I like to keep an optimistic outlook on the portfolio. As management for each position execute (or fail to execute) catalytic strategies I will keep you updated through both our quarterly letters and the blog which can be found at www.rogue-funds.com/blog.
Mistakes
Costamare, Inc
Early this year I explained the investment thesis for Costamare, Inc which is a containership company that I felt was undervalued due to a new segment that was hiding profitability and their high debt load. I then explained the catalysts of the two biggest canals in the world being shut down. I was convinced by someone outside of myself that Costamare was a poor investment decision for reasons that were completely wrong when evaluated in hindsight. Our whole position was on long-term calls that were concentrated at $12/s and some at $14. I bought these positions for extremely cheap and my lack of self-conviction cost the fund ~800 BPS in return. We didn’t technically lose anything on the calls themselves but purely on the upside that we missed earnings as the company moved to nearly $17/share. Due to the Funds general lack of leverage and pickiness, I believe our biggest mistakes will continue to be acts of omission not commission. I believe the best way to avoid these mistakes is to actively discuss them and internally review them to ensure accountability.
Core Holdings Breakdown
I will breakdown the performance of the Fund in order of current holdings/recent divestments then I will break down new long-term additions to the portfolio. I will provide significant updates from the quarterly reports for each position. At the beginning of each investment update, I will link you to our initial investment thesis for that position which can be found on our blog.
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Aware
You can read more about this investment on the Rogue Funds blog here. As I explained in my initial report, Aware is a lumpy revenue business (converting to a smoother long term ARR business) and this continued into the Q1 report. The company had a delay in revenue recognition in Q2 for two big subscriptions which led to low revenue growth in the 1st quarter (3% y/y compared to 15% y/y goal for management). The good news is that the management team is firing on all cylinders when it comes to the cost-cutting strategy, which is directly in line with management expectations from last quarter. Their technology has been grading near the top end of their competitors and they are expecting 3 large negotiations to wrap up in Q2 and Q3. They have added a partnership program and are continuing to figure out ways to market their current products in unique ways. The downside is very limited with Aware ($29m in cash and $40m market cap) as it is very unlikely that they will ever trade below cash since they are sitting very close to breakeven (stopping cash burn). Management grew recurring revenue at 23% last year and they expect double digit growth again (their goal is 15%) a year and management has been very accurate about this guidance in the past. Management continues to practice what they preach and I have faith in their continued execution. These aren’t stand out numbers but Aware doesn’t need incredible numbers to move up significantly from their current valuation. This is the largest position in the Fund.
Moberg Pharma
You can read more about this investment on the Rogue Funds blog here. Moberg Pharma has created the best treatment for toenail fungus and is ramping up worldwide sales in 2025. I expect there could be possible future dilutionary events but overall, I believe that this investment is worth well over $1 billion market cap, leaving plenty of protection from future dilution. They have partners all over the world with Europe and Canada beginning sales in 2025, which should lead to large royalties and milestone payments allowing them to ramp up their sales and manufacturing for the US in 2026/2027 where they will have a massive opportunity. They just began Swedish sales of Terclara in April and they already have a market leading position in Sweden. We will get an idea of sales data in their Q2 results. This is our 2nd largest position in the Fund.
Mitchell Services
You can read more about this investment on the Rogue Funds blog here. Their stock price has appreciated about 20% from when we first took our initial position. Mitchell Services is a drilling services company based out of Australia that took advantage of the instant write-off program that ended in 2023. This allowed for rapid growth while also hiding earnings (but pushing FCF) as depreciation remains near highs. As the earnings begin to increase, the company is much more likely to be noticed just as they enter a return to shareholder strategy that is being pushed by their chairman and largest shareholder. Currently they have a 10% buyback program in place and a 5% dividend. I believe they have a possible 4-5 bagger potential based on the current share price. This is the 6th largest position in the Fund.
FFB Bancorp (no changes, same summary as Q1 2024)
FFB Bancorp is a great performing bank out of Fresno California with a CAGR of 25% and an ROE of 30%. This bank has grown at a sustainable rate with little loan risk. As many individuals are aware, the commercial real estate market is running full steam towards collapse and this could have effects that impact multi-family housing and real estate throughout the country. Although FFB Bancorp is exposed to some of this risk, I believe it is an extremely safe investment and is protected by their merchant fee business. With only a P/E of 7, I think there are numerous catalysts that could cause the stock price to double or triple. Currently they are listed Over-the-Counter (OTC) and are about to get hit with the increased regulatory costs of managing assets over $1 billion. After the initial setbacks in cost from regulations and their eventual listing on an exchange, we should see an increase in liquidity and the stock price increasing. This is the 7th largest position in the Fund.
Achieve Life Sciences, Inc
You can read more about this investment on the Rogue Funds blog here. This investment is more of a special situation with extremely high odds of being a multi-bagger in a very short time period. The company has created a nicotine cessation drug that vastly outperforms the current market leader (Chantix) which came out in 2006. The Company is trading extremely cheap due to a poor fundraising history and a one-year delay created by the FDA. Based on the current market they are trading for 1/5-1/8 their true market potential and will make a prime buyout target. Due to the massive upside and short time frame, the Fund owns both stock and a small number of calls. The most recent update is that their year-long trial has officially started. This is the 8th largest position in the Fund.
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Global Atomics (Uranium)
This is where the portfolio has experienced its biggest turmoil. Uranium prices have ticked down substantially (it’s the slow part of the Uranium buying cycle and it’s a very illiquid market) and Niger has taken mining permits away from two miners (Orano and Goviex) since their coup. This has caused quite a bit of volatility in our uranium holding (-20%) of Global Atomics, which is now our only uranium holding. This is the highest risk holding that we have but I am extremely confident this will pay out handsomely for us. This is a very fundamental based bet that I believe doesn’t have nearly the risk that many investors would stray away from. So why am I confident if two other miners have had their permits pulled?
- Global Atomics has held their mining permit for a much shorter time period than Orano or Goviex showing that they are taking action to produce pounds (hence producing income for the government).
-The CIA did a feasibility study on the two mines that were taken and determined that neither mine was realistic unless Uranium Prices maintained very high levels leading to both companies dragging their feet when Uranium prices dipped below $50/lb. So it’s not shocking that their mining permits were revoked as the companies pushed the boundaries of the time limit on their mining permits.
- Orano has a history of bad practices in Niger and were going to sit on their mining permit without actually utilizing the mine. Orano had no actual interest in mining the Imouraren mine.
- Global Atomics Dasa mine is the only mine that the new government has publicly endorsed (and has done so numerous times).
- Their financing is a huge risk due to the perceived geopolitical risk and if they get good terms this will serve as a serious catalyst for the company. Bad financing terms are already relatively priced in as most experts expect poor financing terms and the stock remains near 4 year lows.
- Despite headline news articles, there are no signs that Russia has taken any specific interest in any of the mining rights of any mine and there is very little sign of cooperation with Russia in general. Niger seems to be pushing back against most large global influences.
- The IMF has restarted their payments to Niger showing international cooperation.
- If Uranium prices move back above $100/lb, which seems very likely, then this has the potential of 5x-10x depending how high prices move. If uranium merely maintains their current position, then I believe we could see a 3 – 5x in the position.
- Zinc prices have begun to move up which could make their Zinc facility a boon to the balance sheet to raise cash.
- The CEO of Global Atomics has a major position and hasn’t sold.
- History of minimal dilution for a mining company.
We have not added to our Global Atomics position and we will continue to monitor the situation closely. This is outside the normal scope of investments that the Fund makes but I believe our exposure is appropriate for the risks and upside. If I feel something significant changes in the risk profile, then we will take quick action to cut our losses. This is the 9th largest investment in the Fund.
Advanced Micro Devices, Inc. (AMD) Puts
We still hold AMD puts and have not seen an earnings report since we bought these puts. The last earnings report was disappointing as expected and I believe this earnings report will be similar. AMD is trading at very lofty valuations despite little growth outside of their AI segments which will not maintain their current speed or pricing power. To compete with Nvidia they have ramped up R&D yet continue to lose massive amounts of market share (and pricing power). I do not think their valuation has taken into account how poor their market position has become as the rest of their revenue segments continue to slow down. Numerous large customers are dropping AMD and I expect this to continue. I am also under the impression that their newest chip (which is the main thing holding the stock price up) has been a relative disappointment. We have taken a roughly 30% decline on these puts which isn’t surprising as flows continue to push into the AI chip industry.
Rimini Street (sold out)
You can read more about this decision on the Rogue Funds blog here. Last quarter I told investors that I found it very likely that we would stick with Rimini Street through 2025 however, I didn’t expect this opinion to change so fast as we have officially sold out of our position. This decision was driven by very poor management execution on the sales side which has lowered their upside even if the lawsuit gets decided in their favor (which I think it will). The other driving issue is that competitors have plummeted their prices to match Rimini, which contributed to their slowdown in growth. The downside is very limited with Rimini due to their high revenue retention and great service. Due to the decent downside protection, I will continue to monitor them closely. We escaped with slightly less than a 5% profit.
Sezzle (bought and sold small active position, now sold-out)
I bought Sezzle, again, briefly on what turned out to be part of our active portfolio as it continued to double in the following days after falling to $45/s and releasing incredible results and great guidance. I decided to buy back in with a small starter position and the position appreciated to $80/share within a couple weeks at which point I sold again. I really am hesitant in my evaluation of their valuation at these levels (even though competitors trade at much higher multiples). A huge part of their acceleration in profitability last year was grabbing the low hanging fruit by increasing the lifetime value of their customers via Sezzle Anywhere and Premium. Their work is cut out for them now as they have to begin growing customers in a much more saturated market in the US (BNPL growth in the US is expected to slow substantially by 2026/2027). They also have not shown an ability to scale into larger partnerships that have already been captured by competitors (some examples are Klarna partnering with AirBnB and Affirm with Amazon). These are all headwinds and don't include the credit card headwinds that are building with Chase banning their cards to be used with BNPL. I think Charlie is a great CEO and I hope he can figure out their customer growth story but, it will be a difficult transition that I have little insight into.
New Long-Term Holdings
We have added 3 new core holdings that we believe have great futures based on their valuation and management teams.
HAYPP Group
We wrote about HAYPP group on the Rogue Funds blog and highly advise you to check out the full post. HAYPP is a Swedish online retailer of nicotine pouches and has the market leading position among e-retailers. Currently their profitability is hidden by their growth in new markets such as the US, UK and other large markets. Their operating leverage will have them taking their EBITDA margins from -2% to 8% by early to mid-2025 (with little capex). Their growth in the US has been at a huge 40%+ y/y rate that I believe could be even higher currently. Based on online monitoring, their sales are climbing at unprecedented levels especially as competitors take market share away from the leading nicotine pouch manufacturer, Zyn. A larger breakup in the branding of nicotine pouches benefits HAYPP as customers seek out variety by going to non-brand specific retailers. This is the 3rd largest position in the Fund.
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RADCOM, Inc
Radcom is an Israeli 5G assurance company that I have been monitoring for a couple quarters as they inflect profitably. Because their biggest owner died and their CEO resigned (he still works with the company in an advisory role), I was curious how this would impact the company as they entered a very high marketing phase. After putting a lot of R&D into the company’s technology they are beginning to put those costs into marketing to grow the business in areas like Asia and Europe. This has been working even better than expected as they have already entered into multi-year agreements with huge 5G companies. Their growth has been much better than expected and the sales team is firing on all cylinders. They have a boatload of cash that they plan on using to acquire a company that meets their standards. The current management and board have not been able to identify any quality acquisitions and I would not be surprised to see them begin to buy back a substantial number of shares. The best part about this investment is that as they continue to execute above expectations, their stock price has continued to go down and made a great buying opportunity for us. I will be posting an article regarding Radcom soon that will go more in depth into this position. This is the Funds 5th largest Position
Root, Inc
We wrote about Root, Inc on the Rogue Funds blog and highly advise you to check out the full post. Root is an auto insurance company that we took a position in at the end of June. They are a rapidly growing insurance company focused solely on telematics with an industry-leading loss ratio that is on the edge of a sub 100% combined ratio. This position significantly accelerated in July and we will continue to monitor this position before reporting returns in Q3. We only took a partial starter position (7% initial position) as we expected Q2 results to be much more disappointing than in their past few quarters resulting in a lower price to DCA into. I had mixed feelings when the stock price accelerated within a couple weeks of our initial position but due to their low float and high short interest I expect large amounts of future volatility.
Structure, Fees, Expenses, and Performance Allocation
I have stated in each letter that the Fund will continue to experience volatility that most investors are not comfortable with or are not used to. In this quarter alone, we had substantial changes in the valuation of the Fund within any given month. Investors of course view a relatively “smoothed” version of this volatility but there is a real chance that unlucky timing could result in our monthly performance or quarterly performance being severely impacted by these short-term swings.
Because of this, it is in each of your best interests to carry a long-term oriented view of the Fund’s performance. I will continue to reiterate this quarter to quarter and year to year. We are looking for investors who share this ideology and are willing to bear with us through periods of short-term volatility. Many investors throughout history have panicked during moments of heightened volatility and it has cost them greatly to do so. We wish to avoid this for both the Fund’s benefit and each of our investors’ benefit. Each of our investors thus far has held onto their long-term orientation and it has benefited everyone. I appreciate each of you for your endurance as an investor in the Fund and I am extremely proud to have you as a Rogue Funds investor.
Tax Commentary
Our goal is to hold positions for over a year (and even longer for quality compounders) to encourage long term capital gains benefits but, if I feel that it is in the long-term benefit of investors to sell early, then I will sell early.
The main reason for selling early is rapid value appreciation within months of the initial position, substantial opportunity costs by holding a position, and significant risk profile changes. We have experienced a lot of turnover as we officially sold our 2nd longest position (Rimini Street, for roughly no gain or loss) and now only hold one position with over a year in the portfolio.
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Looking back at each position that we have sold, it has easily been in the Funds best interest months later to have sold most of those positions when we did and I will try to continue to reduce your tax burden without substantially hurting returns of the Fund. As I monitor our past core positions, I will ensure I identify times when I sold too early that led to a significant tax burden on investors and try to correct those issues in the future.
We have had numerous investors interested in investing their retirement accounts into the fund. I am actively working on this and have already discussed this with lawyers and our accounting firm. I will give further updates in Q3 and Q4.
Structure and Fees
As many of you are aware, the investors in the Fund bear few costs aside from the management fee and the incentive allocation. The management company covers most expenses creating an extremely friendly expense ratio for all our investors. The management company is funded by equity from myself and the one percent management fee which is extremely sustainable and investor friendly to try to keep the expense burden off investors. Initial investor minimum allocations are still $100,000 with additional subscriptions of $25,000.
Update Schedule
I will continue to update each of you through our quarterly letters and you can view our updated tear sheet on the website each month. These updates will usually occur sometime between the 15th-20th of each month.
For the first three quarters of each year the letters will be shorter, mainly contributing to a summary of performance for that quarter and any substantial changes in either the portfolio or the structure. The 4th quarter letter each year will continue to be our most substantial letter.
Summary
I would like to thank each of you for investing in Rogue Funds, LLC. If you have any questions, please email or text me as needed. I will continue to look forward to the future years running this Fund. As always, I would also like to thank my beautiful Fiancée for editing this letter while also being my biggest supporter and the best partner I could ask for.
Respectfully,
Jacob Rowe
Chief Investment Officer
Rogue Funds, LLC
Disclaimer
This document is being provided to you on a confidential basis. Accordingly, this document may not be reproduced in whole or part, and may not be delivered to any person without the consent of Rogue Funds Management, LLC (the “Manager”). Nothing set forth herein shall constitute an offer to sell any securities or constitute a solicitation of an offer to purchase any securities. Any such offer to sell or solicitation of an offer to purchase shall be made only by formal offering documents for Rogue Funds, LLC, managed by the Manager, which include, among others, a confidential offering memorandum, operating agreement and subscription agreement, as applicable. Such formal offering documents contain additional information not set forth herein, including information regarding certain risks of investing in a Fund, which are material to any decision to invest in a Fund.
No information in this document is warranted by the Manager or its affiliates or subsidiaries as to completeness or accuracy, express or implied, and is subject to change without notice. No party has an obligation to update any of the statements, including forward-looking statements, in this document. This document should be considered current only as of the date of publication without regard to the date on which you may receive or access the information.
This document may contain opinions, estimates, and forward-looking statements, including observations about markets, industries, and regulatory trends as of the original date of this document which constitute opinions of the Manager. Forward-looking statements may be identified by, among other things, the use of words such as “expects,” “anticipates,” “believes,” or “estimates,” or the negatives of these terms, and similar expressions. Actual results could differ materially from those in the forward-looking statements due to implementation lag, other timing factors, portfolio management decision-making, economic or market conditions or other unanticipated factors, including those beyond the Manager’s control. Statements made herein that are not attributed to a third-party source reflect the views and opinions of the Manager. Opinions, estimates, and forward-looking statements in this document constitute the Manager’s judgment. The Manager maintains the right to delete or modify information without prior notice. Investors are cautioned not to place undue reliance on such statements.
Certain information contained herein has been obtained from third-party sources. Although the Manager believes the information from such sources to be reliable, the Manager makes no representation as to its accuracy or completeness. Return targets or objectives, if any, are used for measurement or comparison purposes and only as a guideline for prospective investors to evaluate a particular investment program’s investment strategies and accompanying information. Targeted returns reflect subjective determinations by the Manager based on a variety of factors, including, among others, internal modeling, investment strategy, prior performance of similar products (if any), volatility measures, risk tolerance and market conditions. Performance may fluctuate, especially over short periods. Targeted returns should be evaluated over the time period indicated and not over shorter periods. Targeted returns are not intended to be actual performance and should not be relied upon as an indication of actual or future performance.
Unaudited net return data for the Fund is estimated, net of all fees and expenses (From inception on May, 2023 through March 31, 2024). The net return presented is also net of Incentive allocation of 20% unless stated otherwise.
The past performance of the Fund is not indicative of future returns. The performance reflected herein and the performance for any given investor may differ due to various factors including, without limitation, the timing of subscriptions and withdrawals, applicable management fees and incentive allocations, and the investor’s ability to participate in new issues.
There is no guarantee that the Manager will be successful in achieving the Funds’ investment objectives. An investment in a Fund contains risks, including the risk of complete loss.
The investments discussed herein are not meant to be indicative or reflective of the portfolio of the Fund. Rather, such examples are meant to exemplify the Manager’s analysis for the Fund and the execution of the Fund’s investment strategy. While these examples may reflect successful trading, not all trades are successful and profitable. As such, the examples contained herein should not be viewed as representative of all trades made.