Protean Funds - Evolution: Has Kept Sliding, But Has The Potential To Be Excellent

seekingalpha06-12

Evolution is a Swedish online gambling supplier with strong financial performance, but domestic funds avoid it due to moral concerns.The company trades at a low valuation, grows organically, and has a...

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Sinenkiy/iStock via Getty Images The following segment was excerpted from this fund letter.  Evolution (OTCPK:EVVTY) During May we initiated a position in Swedish online gambling supplier Evolution. Similar to the situation in Swedish Match (RIP), domestic funds shun it because gambling is considered a vice we should be without. This moral frowning is causing the valuation to be out of whack. The company continues to post unbelievable results, as it has done continuously for the past decade, but there isn't a single domestic fund with an overweight position in the stock (but us). Our view is that companies that comply with local laws and regulations, regardless of industry, are potentially worthy of investment. A fund is a very poor way to express moral views. Heck, the only likely impact from funds collectively deciding gambling - one of the oldest past-times of humanity - should be excluded, is a lower return for its investors. It certainly won't change the demand for world-class gambling services. If exclusion causes the stock to become too cheap, it will be bought by someone more rational. Evolution trades on low teens EV/EBIT, grows organically at 15-20%, with EBIT margins in the 70s, and has a net cash balance sheet. It rides on a global structural growth trend of offline to online migration. It keeps investing in capacity and innovation to maintain and hopefully expand the gap to its smaller competitors. The management team has repeatedly shown astute capital allocation skills with the timing of buybacks, and it would not surprise us if a new program were launched shortly. The stock has continued its southward journey since we bought our starting position and added. Analyzing the potential reasons for the underperformance, be it the political situation in Georgia adding uncertainty, the significant investments in new capacity weighing on short-term margin expectations, the negative FX-impact, a large institutional shareholder selling part (or all) of their shares, or chatter about Asian crypto exposure, there is nothing that changes the fundamental and long-term picture for us. Isadore Sharp, the founder of Four Seasons, is quoted saying \"Excellence is the capacity to take pain\". Evolution has kept sliding through the month and qualifies as a top-three negative contributor to the fund's return in May. Painful. But we take it in stride, as it has the potential to be excellent.   DISCLAIMER: Investments in a fund can both increase and decrease in value. You are not guaranteed preservation of invested capital. Click to enlarge  Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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