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Seven years ago, Justin Deutsch and Fla Lewis III felt like they were missing opportunities in certain stocks. While the companies looked promising, they didn't quite fit the parameters for their Weybosset Fundamental Value Strategy.
So the two portfolio managers at Weybosset Research & Management, which oversees $400 million, launched another fund for themselves and clients called the Special Situations Account. As the name implies, the small $5 million fund — which is now being opened up to outside investors for a hefty minimum investment of $1 million — holds stocks that Deutsch and Lewis think are uniquely positioned for upside in the near-term, and has no pre-determined formula for what it invests in or for how long. It depends on each situation.
Today, the returns that the duo have put up via the separately managed account since its inception have outpaced their value fund as well as the broader market. Its returns before fees since 2018 are 787%, or 36% annualized. The S&P 500 is up 155% including dividends over that span. This year alone, the Special Situations Account is up more than 95% before fees.
According to 47-year-old Deutsch, a large part of the fund's success is its high concentration levels. Taking inspiration from the philosophy of investing icon Warren Buffett, the fund holds anywhere from two to five stocks at a given time. While high concentration levels can be a more risky or volatile approach than a more diversified portfolio, the strategy can also pay off big.
"You've got to be right," Deutsch told BI.
It also comes down to timing. Deutsch and Lewis keep their eyes peeled for beat-up value opportunities and then look for signs that price and trading volume momentum are picking up for the stock.
"I'm looking for stocks that, for whatever reason, have gone down 80%, 85% from their highs," Deutsch said. "And then when momentum finally comes into favor, kind of push the gas pedal a little bit and take positions from, let's say, 30% all the way possibly to 70%."
Earlier this year, the fund got a big boost from its bets on China via Tencent (TCTZF), JD.com (JD), and Alibaba (BABA), Deutsch said. Right now, its holdings consist of just two firms: Illumina (ILMN), and Maxlinear (MXL).
Illumina, a biotech gene-sequencing firm, is the bigger position of the two at a 70% weighting. The stock is still down 70% from its 2021 highs, but is up 55% since 2023, momentum which Deutsch has jumped on.
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"They did a horrible acquisition which cost them billions of dollars, and then subsequently they ended up divesting of that acquisition," Deutsch said. "In parallel of divesting of the acquisition, they were also getting kicked out of the S&P 500 and every single index known to man."
Maxlinear, meanwhile, makes up the other 30% of the fund. It's a telecom stock that's set to get a big boost from telecom and AI spending, Deutsch believes, as it produces optical transceivers that are crucial for data centers.
Its stock is currently down 74% from December 2021 highs. Since August, however, it has surged by 71%.
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"The CEO came out in August and bought about $1.5 million worth of stock, so that sort of piqued my interest," Deutsch said. "You could look at the competitors — Credo, or Coherent, or Marvel all have business tied to optical — and they've just exploded."
