Q2 2025 Letter - Big Changes

U.S. stock markets posted strong returns for the second quarter, hitting new all-time highs as investors brushed off tariff related news. Inflation continues to moderate, and CPI came in at 2.4% through Q2. The labor market remains resilient with an unemployment rate at 4.2%. However, just over the last few weeks the latest CPI reading jumped to 2.7%. Unemployment rate also increased to 4.3%. Its very possible this could be the first sign of tariff impacts starting to appear in the data.

Quarterly Performance

Seaside Private Capital (SPC) underperformed for the 1st half of 2025, finishing -14.39% vs. the S&P 500 at 5.50%.

Big Changes

SPC has underperformed for the first half of the year, which at face value is not something to be proud of. However, about a third of our portfolio, 33% to be exact, is sitting in cash. Which means the underperformance has come from a few stocks that have had extremely volatile swings as of late. Global Payments (NYSE: GPN), UnitedHealthcare (NYSE: UNH) and Warner Bros. Discovery (NASDAQ: WBD) have been the 3 standout laggards holding down our performance. UNH in particualr has been hit the hardest. I'll discuss all three later in this letter, but for a quick summation, we are confdent in all three of those holdings.

The market made a remarkable comback in the second quarter, climbing 10.94% and hit new all time highs. Our high cash position hurt us during this market rally. However, as I write this letter, valuations are starting to get stretched, the economy is showing signs of slowing, and inflation is starting to creep back up. The full effect of tariffs have yet to be seen, but early signs are starting to show up. Taken in its totality, we are very comfortable holding a high cash position at this time.

We are also strategically repositioning our portfolio for a large private market purchase. During Q2 we entered into a purchase agreement to acquire an investment property in the North County Coastal area of San Diego. We are structuring the transaction with 38% equity and 62% debt. Given where markets are at, we find this as an attractive investment opportunity. For conservative underwriting, we estimate a 3 year holding period, which will produce a 36.43% IRR and a 1.63x equity multiple. To fund this purchase we intend to deploy our current cash reserve.

Since the close of Q2 we have completely reoriented our portfolio. We liquidated some of our big winners to fund the private market purchase and in doing so created significant taxable gains. Due to these sizable gains, we are in an opportunistic position to tax loss harvest some of our losers. As we have mentioned previously, we have been transforming the portfolio and have had a few legacy positions where we were waiting for the right time to sell. That time has finally arrived. As the market hit all time highs, we were able to sell all of our winners at what we believe to be attractive valuations. We think our losers are still undervalued, but there is great benefit in capturing the tax savings up front. After taking advantage of the 30 wash-sale rule, its very possible we repurchase the same securities we recently sold (as mentioned, we are confident that these companies are highly undervalued). This helps us minimize our taxable gains for the year, for which we are still very much in the green. Additionally, we may be able to redeploy our capital at a lower cost basis. In some cases, particularly our legacy non-core holdings, we plan to redirect our capital into more attractive long-term holds. We'll provide more commentary on this portfolio repositioning during our Q3 letter as most of this action has happened after 6/30/2025.

Portfolio Update for Q2

For Q2 we sold one long-term holding, Emerson Electric (NASDAQ: EMR). Emerson remains a great company and I still hold a significant position of EMR in my personal retirement account. For the SPC Fund, we only had a small position and decided to consolidate. EMR generated phenominal returns for us. Over our 9 year hold period, EMR produced 14.98% IRR and a 3.52x equity multiple. What a great compounder. If the stock sells off on weakness I would love to buy more and make this a core holding in the Fund.

We breifly mentioned above about how our portfolio performance this year will be unusually volatile given our high cash position. We have taken a much more defensive stance throughout the year as we believe market valuations are streched and the current risk/reward is not very attractive. Additionally, the few holdings we do have are exremely volatile, particularly UNH. They say misery loves company. Just in the past 6 months UNH has had an executive being murdered, potential DOJ investigation, Medicare Advantage mispricing that hurt earnings, the CEO resiged, and as I write this letter thier CFO has just been replaced. That's a lot of drama in 6 months. We think just about all of these issues are short term in nature. Stephen Hemsley, who served as CEO from 2006-2017 has a remarkable track record and understands the business well. The Medicare Advantage cost overrun has been a big surprise and has taken the stock down. Basically UNH brought on a bunch of patients and mis-priced how sick they actually were. Fortunately, this will get repriced early next year. Again, a short-term issue. We generally look at investing from a 3-5 year hold and we believe UNH will have these issues resolved by then.

Another 3-5 year hold is WBD. The stock has performed terribly since our initial investment. However, they are turning a corner and heading in the right direction. The streaming business is starting to generate growth and is EBITDA positive, on track to prodice over $1.3 Billion in EBITDA this year. The studio business, although choppy, has produced some great hits this year. The linear TV business is still pretty weak, but a spinoff next year should help give a boost to the valuation of the streaming business. Also, WBD is currently at 3.3x Debt/EBITDA, down from over 5x in just a couple years. We still believe in this business and we are in year 3 of our original 3-5 year projected timeline. So we still are on track.

Concluding Remarks

Through the first half of the year our returns may seem very unremarkable. Although the market is up over 5% on the year, we have mainly been focused on downside protection. We believe there is much more volatility ahead of us, especially as the Trump tariff policy begins to make its way into the data. We believe the most recent economic data of inflation ticking back up is just the tip of the iceberg. Having said that, let me be clear - we are not happy about our underperformance year to date. However, we are highly confident that we are in a position to generate attractive long-term returns. Given our high cash position, a few holdings that we have remaining our driving the volatility of Fund. One holding in paricular, UNH, has been the main culprit. Through the many negative headlines we believe this is still a highly attractive investment.

Sincerely,

Daniel Fas

Founder & CIO at Seaside Private Capital