Q3 21

Q3 21

Q3 21 Letter to Shareholders

Third Quarter 2021

The Frank Value Fund Institutional Class returned (-3.77%) in Q3 2021 compared to 0.58% for the S&P 500 TR Index and (-1.01%) for the Russell Midcap Value Index. Please see the end of this letter for more performance information.

 

Numerous Frank Value Fund holdings declined into quarter end, only to rebound in October. Although there are bumps in the road, we believe value is coming back in favor, and our holdings have lots of room to appreciate to catch up with already improved fundamentals. As the world reopens, it is clear supply chains are stretched, and our large investment in the energy sector is timely. These trends are only beginning to be noticed and the fund is positioned to benefit significantly as investors reposition for this new world.

Crude Awakening

Underinvestment in traditional energy sources is beginning to bite global consumers. Natural gas prices in Europe are increasing exponentially as investors and companies fear supply shortages before the winter. The price of crude oil is approaching $80 per barrel despite planned increases in OPEC+ production. Fundamentally, our thesis is playing out. However, during the quarter, four of our five energy positions underperformed the S&P 500 Energy Sector. This has to do with flows – money going into the S&P 500 and not our small and mid-cap companies. Importantly, there is great news regarding the cash production in these Frank Value Fund positions. Our one energy holding that outperformed the S&P 500 Energy Sector in the quarter was also the only company that announced a stock repurchase. An announcement of an intent to repurchase just 5% of Civeo’s outstanding stock caused the stock to appreciate over 25% in Q2 21, compared to a loss of -2.8% for the S&P 500 Energy Sector. Investors reward stock repurchases, and companies like Civeo that repurchase at low valuations reward shareholders over the long-term as well. We believe Civeo will ultimately purchase a much higher percentage of its own stock and this will continue to play out in 2022. As for our other four energy positions, each of them has a strong balance sheet and pending cash flow, making it a matter of time before repurchases are announced, probably early in 2022, when capital expenditure plans are announced for most of the oil majors. Value investing is a game of patience, but as we have seen with Civeo, upside occurs when fundamentals push stock prices higher. Investors purchasing our holdings now have certainty in strong fundamentals backed by the globe’s energy needs.

New Healthcare Positions

Events in a select few healthcare companies created great entry points for the Frank Value Fund in Q3 21. During the third quarter, the pharmaceutical distributor companies took large legal reserves for the potential settlement of opioid litigation. This abhorrent chapter has been an overhang of risk for several years. Now that we have an estimate of the size and timing of payments, two of the big three distributors are attractively valued, and the Frank Value Fund initiated positions in both during the second quarter. With the average company in the S&P 500 paying a 1.4% dividend and producing about 3% of the enterprise value in free cash flow, Cardinal Health (NYSE: CAH) boasts a 3.8% dividend and over a 10% FCF/EV yield after deducting its annual legal payments. This is too cheap relative to the company’s steady growth, the S&P 500 average valuation, and Cardinal’s own valuation history. Management appears to agree with our analysis, as they have guided $500 million to $1 billion of repurchases in fiscal 2022, which would be 5% of shares outstanding, or the largest share repurchase in the company’s history!

 

Another event creating an opportunity for Frank Value Fund shareholders is an asset sale by Walgreens Boots Alliance (NYSE: WBA.) Walgreens sold a business in the third quarter and will receive about $6.8 billion of cash. However, after the close of Walgreens’ most recent quarter, the deal has yet to close and cash is not reported on the balance sheet, so quantitative strategies may have missed this significant change. This $6.8 billion windfall amounts to 15% of WBA’s market cap, and it pushes the balance sheet into equal amounts of cash and debt. This strong balance sheet is superior relative to CVS, the largest competitor, which is saddled with $27 billion of net debt. Yet, Walgreens trades at a discount to CVS, despite a mightier balance sheet and more room for margin improvement. Frank Value Fund shareholders are paid to hold Walgreens, which at this price pays nearly a 4% dividend. Collectively, these new healthcare positions represent nearly 10% of fund assets and have pushed the dividend yield on the fund to 1.8%.

 

On both an absolute and relative basis, the fund has superior return expectations. The mix of strong fundamentals, announced and potential stock repurchases, and high dividend yields put the fund in an enviable position to create long-term wealth. We have an adequate number of opportunities and are optimistic for the future.

Performance as of 6/30/21 Total Return  

Average Annualized Total Returns

YTD % 1 Yr. % 5 Yr. % 10 Yr. % Since 7/21/04 %
Frank Value Fund* 4.09 7.46 3.24 7.44 6.60
Russell Midcap Value 18.24 42.40 10.59 13.93 10.23
S&P 500 Total Return 15.92 30.00 16.86 16.61 10.57

Please see our website for distribution information. Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. You may obtain performance data current to the most recent month-end by calling the Fund at 1-888-217-5426 or visiting our website at www.frankfunds.com. Returns include reinvestment of any dividends and capital gain distributions.

Non-FDIC insured. May lose value. No bank guarantee. The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus contains this and other important information about the Fund, and it may be obtained by calling 1-888-217-5426.   Please read it carefully before you invest or send money.

This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed.

The information in this portfolio manager letter represents the opinions of the individual portfolio managers and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio managers’ views are as of October 6, 2021 and are subject to change without notice.