In the first quarter of 2026, Palm Harbour Capital's fund experienced a modest decline of 0.56%, yet this performance notably surpassed several European and global benchmarks. The fund maintains a robust long-term outlook, with a five-year compound annual return of 10.6% and an impressive inception-to-date NAV return of 95.3%. Despite a turbulent market marked by shifting trends in metals and AI, and heightened geopolitical tensions in the Middle East that fueled energy and commodity price rallies, the fund remained focused on its micro-economic strategy. This approach allowed it to identify and capitalize on undervalued assets while upholding a steadfast long-term value discipline. The detailed investor letter highlighted key contributors such as Vitzrocell, Vår Energi, and Danieli & C Savers, alongside detractors like Ibstock, Esprinet, and Converge. Additionally, the letter delved into the strategic positioning and growth potential of Cirsa Enterprises, an omni-channel gaming company, showcasing its resilience and attractive free cash flow yield in a fragmented yet regulated market.
Detailed Investment Report: Performance, Portfolio Adjustments, and Strategic Insights
During the initial quarter of 2026, Palm Harbour Capital’s fund recorded a marginal decrease of 0.56% by March 31, 2026. This result, while a slight dip, was considered to be relatively strong when compared to broader European and global market indices. The fund’s Net Asset Value (NAV) concluded the quarter at 19.51, representing a minor adjustment from the previous quarter’s 19.62. Over the preceding twelve months, the fund achieved a respectable 9.4% NAV return. The long-term perspective remains exceptionally positive, with a five-year compounded annual return reaching 10.6% and an overall return since inception standing at 95.3%, equating to a 10% compounded annual return. The fund's unique portfolio composition means its performance trajectory differs significantly from traditional market benchmarks.
The quarter saw varied market dynamics. Initially, strong performance in January and February propelled the fund to new highs, driven by rallies in metals like gold and copper, and a notable shift in the artificial intelligence sector, favoring previously overlooked companies. However, this momentum was disrupted in late February by escalating geopolitical tensions in the Middle East, which triggered a sharp increase in energy and commodity prices and reignited concerns about inflation. Amid this volatile environment, characterized by rapid shifts in market sentiment based on discrete data points or even social media activity, Palm Harbour Capital consciously maintained its focus on fundamental micro-economic analysis, actively seeking out undervalued opportunities rather than reacting to short-term market noise.
Key positive developments included Compagnie de l'Odet, which benefited from a substantial €4.2 billion dividend announced by its principal asset, Bolloré SE. This move is expected to bolster Odet's capacity to consolidate its control over Bolloré and enhance group-wide financial flexibility. Despite a 25% sell-off in Universal Music Group (UMG) shares due to AI-related concerns, the fund views this as an undervaluation, anticipating future positive developments. Conversely, the fund divested its positions in Solvay, a soda ash producer, due to concerns about increasing low-cost capacity and subdued demand, and a minor holding in Unilever’s spin-off Magnum’s, reallocating capital to promising new ventures in Portuguese logistics and Korean eyecare.
At the close of the quarter, the portfolio showed an estimated 110% upside to its Net Asset Value, boasting a weighted average P/E ratio of 6.3x (net of cash), an 18% free cash flow to enterprise value yield, and a 28% return on tangible capital.
Leading the positive contributions were:
- Vitzrocell, a South Korean lithium primary battery manufacturer, saw a 95.5% increase, contributing 136 basis points. Its specialized batteries, ideal for extreme conditions in smart meters, military, and oil & gas sectors, drove robust growth, with a 15.3% revenue increase in 2025 following strong performances in previous years.
- Vår Energi, a Norwegian oil and gas operator, rose by 67.5%, adding 117 basis points. The company's strategic expansion, with 10 new development projects and 14 projects underway, positions it for significant free cash flow generation. Its Q4 2025 results significantly exceeded expectations, with record production and reduced operating costs.
- Danieli & C Savers, an Italian steel plant maker, contributed 50 basis points with a 14.9% gain. Despite a sales decline, EBITDA grew by 17%, driven by strong plant-making margins and improved steel production. The company's robust order book and increasing cash reserves underpin its long-term potential.
On the downside, key detractors included:
- Ibstock, a British brick and concrete manufacturer, declined by 27.9%, subtracting 74 basis points. The company faced challenges from cost inflation and a shift towards lower-margin products, though long-term prospects remain positive with the UK government's ambitious housing targets.
- Esprinet, an Italian electronics distributor, fell by 20.5%, deducting 46 basis points. Despite rising sales in Iberia, the company's net debt increased, and the unexpected resignation of its long-serving CEO impacted market sentiment.
- Converge, a Philippine telecommunications firm, dropped by 19.2%, reducing 40 basis points. Slowdowns in subscriber growth due to weather and high capital expenditures for network expansion presented short-term operational hurdles.
The fund also highlighted its investment in Cirsa Enterprises, a prominent Spanish omni-channel gaming company operating across Spain, Latin America, and Italy. With 460 casinos, 80,000 slot machines, and a rapidly expanding online gaming division, Cirsa thrives in regulated markets. Its business model, characterized by long-term concession agreements and dominant market positions against smaller, local competitors, provides stable recurring cash flows. The company’s strategic shift towards an omni-channel model, bolstered by its Sportium brand, and its aggressive buy-to-build strategy under Blackstone’s ownership, have positioned it for strong future growth. Despite potential regulatory challenges and geopolitical risks in Latin America, Cirsa’s focus on disciplined capital allocation, including consistent dividend distribution, deleveraging, and value-enhancing mergers and acquisitions, makes it an attractive investment. Trading at a mid-teens free cash flow yield, Cirsa offers substantial upside as the market increasingly recognizes its growth trajectory and improving profitability.
Palm Harbour Capital is committed to expanding its investor base and has made its fund more accessible through daily dealing, new share classes (sterling and dollar), and distribution partnerships in key European markets. The fund aims to keep total investor costs low and emphasizes transparency in its operations.
As a value investor, the current market climate, marked by its complexities and volatilities, presents both challenges and unparalleled opportunities. It reinforces the importance of a steadfast, disciplined approach, focusing on fundamental value rather than succumbing to short-term market noise. The experience of Palm Harbour Capital in the first quarter of 2026 underscores that while macroeconomic factors will always influence market sentiment, a rigorous micro-economic analysis of underlying businesses remains paramount. Identifying resilient companies with strong fundamentals, capable management, and clear growth trajectories allows investors to navigate turbulent waters and capture substantial long-term capital appreciation. The insights from Vitzrocell's specialized battery market, Vår Energi's strategic energy expansion, and Cirsa's dominant position in regulated gaming all point to the enduring power of deep fundamental research. Ultimately, true value is revealed not by fleeting market trends, but by enduring business strength and strategic foresight.
