Q3 2025 Letter - A New Voyage Begins
- Daniel Fas
- Nov 9
- 5 min read
U.S. stock markets continued to march higher during the third quarter, powered by tech names and anything related to AI. Inflation continues to remain elevated with the latest CPI reading of ~3.0%. However, the labor market is softening, which has led the FED to cut interest rates 2 times so far this year. Overall, valuations remain high with AI names in particular exposed to overvaluation. Recent news headlines involving questionable deal-making among AI companies should be watched with extreme caution.
Quarterly Performance
Seaside Private Capital (SPC) made a historic quarter, finishing with a positive 7.88% YTD vs -14.39% at the end of Q2. That's nearly a 26% gain in the quarter. Nonetheless, the S&P 500 finished near record highs with YTD performance at 13.72%. We are currently lagging the index YTD but are catching up quickly.
A New Voyage Begins
SPC had a monumental quarter in Q3. We have talked about repositioning our portfolio for some time, making small changes here and there. During Q2 we stepped up and made some big changes by tactically taking profits in some names while tax loss harvesting others. When Q3 began, a chain of events happend that required us to pull the ripcord. The Fund is now completely revamped.
It all started with a private market real estate deal (SFR property in a highly desired coastal market). The deal took nearly 4 months to close as there were complications with in-place tenants, which led to an attractive acquisition priced well below market. We believe we struck a bargain. Current comparables trade at roughly $974/SF while our contract price was at $741/SF, a nearly 24% discount. Due to our conservative nature, the deal was capitalized with 38% equity and only 62% debt. Our levered return based on recent comps is over 83%!
In order to capitalize on this private market transaction, we needed to reallocate funds from our publicly traded portfolio. In doing so, we generated significant capital gains taxes for 2025. This was the catalyst that led us to tax loss harvest our losers to reduce our tax exposure and at the same time achieve our strategic repositioning by getting rid of our non-core holdings. We completely cleaned house. We did take a risk on some positions we were bullish on, where we sold to lock in a loss with the intention to buy the stock back after 30 days ( to avoid the wash-sale rule). This worked against us on some positions like Warner Bros. Discovery (NASDAQ: WBD) where the stock took off amid M&A rumors shortly after our sale. However, on others like Global Payments (NYSE: GPN) and UnitedHealthcare (NYSE: UNH) we were able to repurchase at a lower cost basis. On balance we are happy with the end results.
We will provide a quick market update for Q3 and then provide an update on the portfolio. Due to the busy nature of Q3 for the Fund, we will try to keep the updates short and to the point.
Q3 Market Update
US stock markets reached record highs during the quarter with the S&P 500 up 13.72% YTD. This performance was driven by optimism surrounding the potential of AI, solid corporate earnings, and the Federal Reserve cutting interest rates for the second time this year in September. The main story during the quarter was the flurry of questionable deal-making among AI names. See graph below.
It's concerning, maybe even alarming, to see how fragile the AI ecosystem is. This is essentially a form of vendor financing, where you give a client money so they can buy more of your product. Who knows how long this party will go on, but I'm not conviced it will end well.
Lately there has been a lot more chatter about a possible AI bubble, and my quick thoughts on this is that valuations are certainly high, but not as high as the dot com bubble. Back during the dot com mania, Cisco traded at a P/E multiple of over 150x. Nvidia, the current star of the AI boom, is trading at a P/E of ~43x. Valuations today are high but not completely unanchored from fundamentals like they were during the dot com era. The hype is certainly growing, but I don't think we've seen a euphoric "blow-off top" yet either, which would be a sure sign to hunker down.
Portfolio Update for Q3
As previously mentioned, we completely cleaned house during Q3. Some positions were re-purcahsed after the 30 day wash sale rule. Companies that were sold and their respective returns is listed below in no particular order.
META Platforms Inc. (NASDAQ: META): 249.54% Return, 44.37% Annualized
CVS Health Corp (NYSE: CVS): 17.35% Return, 1.94% Annualized
Kilroy Realty (NYSE: KRC): -15.85% Return, -3.74% Annualized
Alphabet Inc. (NASDAQ: GOOG): 60.86% Return, 16.09% Annualized
Simon Property Group (NYSE: SPG): 84.78% Return, 7.84% Annualized
UnitedHealthcare (NYSE: UNH): -37.64% Return, -12.64% Annualized
Warner Bros. Discovery (NASDAQ: WBD): -39.71% Return, -5.00% Annualized
Global Payments (NYSE: GPN): -30.38% Return, -8.32% Annualized
Armada Hoffler Properties Inc. (NYSE: AHH): -19.07% Return, -5.13% Annualized
American Assets Trust Inc. (NYSE: AAT): -7.23% Return, -1.60% Annualized
Salesforce Inc. (NYSE: CRM): 2.02% Return, 1.14% Annualized
Luckily our big hitters (META, GOOG, SPG) had more money allocated to them versus our big losers (UNH, GPN, WBD). After all gains and losses we are still well into the green. By taking advantage of the tax-losses we cut down our tax exposure by over 50%. Following the close of the quarter, we were able to repurchase some of our high conviction picks including: UNH, GPN, and a new holding in Adobe Inc. (NASDAQ: ADBE).
Concluding Remarks
We had a transformative quarter for the Fund. We moved a substantial amount of our equity into a private market purchase. Our investment mandate is quite broad, and as such we can re-allocate capital across any opportunities we see fit. With valuations in equities at all-time highs, we feel confident in this change in allocation. We still believe in finding undervalued opportunities in the public markets, however. We still believe in the holdings we sold during the quarter and even considered re-entering all of those positions. We thinkt he REIT holdings in particular are deeply undervalued. However, as we move forward, our philosiphy is to purchase long-term compounders. This will be a much more tax efficient strategy as opposed to a more tax burdened dividend strategy. REITs also have the drawback in that they are heavily levered and their returns on capital are generally very limited. Over time we believe investing in compounders will lead not only to higher quality results, but also at a much lower risk profile.
Sincerely,
Daniel Fas
Founder & CIO at Seaside Private Capital
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