During our third quarter portfolio update, we profiled portfolio holding, Landstar System (LSTR). Below is a replay of our live commentary on the company from our quarterly portfolio update webinar and an excerpt from our QUARTERLY LETTER.


The global supply chain has been in the news a lot in the past eighteen months. In 2020, the threat of COVID and related lockdowns shuttered “non-essential” production. While most logistics companies were considered “essential,” they naturally scaled back as well. Layoffs or furloughs were common. Some cargo ships, planes, and trucks were temporarily taken off-line as the world sorted itself out.


And then just like that, the world economy came roaring back – and faster than expected. The American consumer in particular started spending and the global supply chain was not fully prepared for it. Dozens of cargo ships are currently stuck offshore waiting to unload at the port of Los Angeles, warehouses are full, trucks are hard to come by, and freight rates have surged higher due to the supply and demand imbalance. In a recent Financial Times article, the CEO of APM Terminals (a division of Maersk) said, “We need lower [consumer demand] growth to give the supply chain time to catch up, or differently spread out growth.”

Despite rising freight prices, new long-haul or “truckload” drivers have been slow to get in on the action. In August, one fleet owner was so in need of drivers it offered up to $20,000 as sign-on bonuses for eligible drivers. In a perfectly rational market without barriers to entry or exit, you’d expect drivers to jump on these large signing bonuses on top of more attractive base pay.

So, what’s going on? Put simply, there aren’t enough young people coming up the ranks to offset veteran driver retirements. The average age of an American truck driver is between 46 and 50 years old and early retirements are common. Veterans understand well that it’s a cyclical business and the end of upcycles often spurs them to exit the industry. In 2019, the American Trucking Association estimated the industry was short about 60,000 drivers and unless more young people entered the industry, the under-supply could swell as high as 160,000 drivers by 2028. And that was before Covid hit. Since then, industry employment has fallen even further.

The broader North American logistics industry is massive, totaling $1.4 trillion in revenue, according to SJ Consulting. For-hire truckload driving accounts for about a quarter of that total, so it’s a critical artery in the supply chain, but it’s also highly fragmented. In 2019, Knight-Swift held a 1.2% market share, which was the largest in the industry. Moreover, 80% of the fleets have between 1-3 tractors, meaning much of the industry is run by small businesses.

Running a small business on wheels is hard, particularly because it includes a lot of paperwork, regulations, and a difficult lifestyle. Truckload drivers are often away from home for days or weeks at a time. These factors also contribute to the lack of new driver supply in the industry. Truckload driver turnover routinely hovers around 100% compared with less-than-truckload drivers (who tend to be home every night) at 10-15%.

The pay drivers receive for hauling a load is revenue rather than profit and the driver must cover fuel, maintenance, truck and trailer payments, and remit other permits and tolls before he or she pockets any for themselves. Industry media site, Freightwaves, estimates that it costs about $118,000 per year to operate a truck before salary and benefits for a truck driving 120,000 miles a year.

With that industry backdrop in mind, we believe Landstar is well positioned to help drivers maximize their take home pay and keep their trailers full as they crisscross the country. We’ve owned Landstar for over a decade in the strategy and we continue to be impressed by the company’s advantages and its operational execution.

Landstar is a platform that connects shippers with agents and carriers to ensure quality cargo delivery. While Landstar also helps shippers move goods via ocean and rail, 90% of its revenue comes from connecting shippers with truckload drivers. We believe Landstar’s moat is rooted in network effects. The more agents and drivers join the network, the more effectively the platform can serve the needs of shippers looking to move goods. The more loads that flow through the network, the more eagerly agents and drivers want to join the network.

Landstar’s agents are independent, and their revenue is commission driven, so they are incentivized to build relationships with shippers and seek out higher priced loads, which tend to be more difficult loads. In 2020, Landstar had 508 agents who generated over $1 million in revenue. Some of these agencies are staffed by multiple people, but it shows that being part of the Landstar network can be lucrative for talented agents.

When a Landstar agent gets a job request from a shipper, he or she looks first for available Landstar Business Capacity Owner trucks (more on that in a moment) and if none are available, will look for available “approved” brokerage trucks.

BCOs are also independent drivers who are not employed by Landstar but have committed to hauling only Landstar loads. They own their own tractors and may or may not also own their trailers. At the end of June, there were 11,557 trucks committed to the BCO network. Depending on the type of haul, Landstar pays BCO drivers between 65-75% of the load price. This is considerably less than the 80-85% that non-BCO drivers receive in the Landstar network, but there are two key factors to consider here.

First, BCO drivers eat first. In the event that the industry cools, being part of the BCO network keeps your trailer fuller than if you were a free agent. Second, Landstar provides BCO drivers with additional benefits like quicker payment and discounts on fuel, tires, and equipment, which together account for about half of a truck’s expenses. By helping drivers reduce back-office complexity, BCO drivers can focus their attention on driving. BCO driver turnover is around 25%, most of which come from retirements and much of which represents new drivers who don’t make it through their first year, versus the industry average around 100%, which speaks highly of the program’s value.

In recent years, we’ve monitored potential threats to Landstar’s model, including digital brokerages like Uber Freight and Convoy, which eliminate the agent and directly connect the shipper with the driver. One of the reasons Uber successfully disrupted the taxi industry is that it unlocked dormant supply of cars and drivers. It’s a different story in the trucking industry where there isn’t dormant supply. Instead, Uber and Convoy entice drivers by paying them nearly the full load price. Not only does Landstar have similar mobile technology for its drivers, but because its loads tend to be non-standard (oversized loads, etc.), its customers often prefer to have a human agent to call to oversee a complicated shipment.

We view higher load rates to be sustainable. While we recognize that the industry is inherently cyclical, we[…]

During our third quarter portfolio update, we profiled portfolio holding, Booking (BKNG). Below is a replay of our live commentary on the company from our quarterly portfolio update webinar and an excerpt from our QUARTERLY LETTER.


On the March 20, 2020 conference call we referenced at the beginning of this letter, we discussed our assessment of online travel agent Booking Holdings during the initial phase of the pandemic. At that time, we explained why we continued to hold a position in the company. We highlighted that while we fully expected demand to collapse and be slow to recover, our analysis indicated that they were very well positioned to survive the pandemic even if it lasted much longer than expected. And we said that companies that survived the pandemic would be well positioned to thrive on the other side

The key for us to holding the stock was our belief that traveling is hardwired into human DNA. While we could not know how long the pandemic would last, we were certain that when it was once again safe to travel, business would boom once again.

Today, more than 18 months later, travel has come roaring back despite the pandemic still not having come to an end. There continues to be significant barriers to travel, such as severe restrictions on international travel and the general health concerns of travelers. But in areas where people are allowed to travel, such as domestically within the United States, leisure travel has boomed.

During the first two weeks of July, which included the 4th of July holiday and occurred during a low point of COVID case counts prior to the rise of the Delta variant wave, total US hotel occupancy was down less than 5% vs the same period in 2019, while prices for hotel rooms were actually up. This strong recovery occurred despite business travel still being extremely depressed.

US domestic hotel performance shows us how humans will behave when they perceive COVID risk to be low and they are not legally restricted from traveling. But the majority of Booking’s business is in Europe, where travel patterns have yet to recover to the extent seen in the US due to a weaker economic recovery, a slower rollout of vaccines, and intra Europe travel restrictions. So, much of the company’s recovery is still to come.

For the full second quarter of this year, which began in April while vaccine rollouts were still ongoing, Booking’s total global hotel nights booked were still down 26% vs the same quarter in 2019. We don’t expect that Booking will report hotel reservations that exceed 2019 levels until sometime next year. But by the summer of 2022, after missing two years of summer vacations and international travel considered safe once again, we believe that Booking’s business will be back and continue to grow significantly for years to come.

But even if travel does return to pre-COVID trends, why will Booking thrive in in the post-COVID world?

It is true that business travel may be permanently lower after COVID as two years of Zoom calls has made some businesses realize they simply don’t need to spend as much money flying employees around the globe. But importantly Booking is highly focused on the leisure travel market and there are no indications at all that COVID has permanently impaired people’s desire to travel the globe on vacation.

It is true that alternative accommodations such as those offered by Airbnb will likely continue to grow faster than hotel bookings. Airbnb, which is the leader in this market, has reported that their own number of new bookings in the second quarter of this year was down less than 1% vs the same quarter in 2019. But this is partially due to Airbnb’s greater exposure to the US vs Europe relative to Bookings. This is an important category of lodging that better meets some leisure travelers needs than a hotel room. However, during the pandemic, travelers have very rationally placed a high priority on limiting their exposure to other people. This made alternative accommodations much more desirable relative to hotels, but for a reason that we do not believe will persist as the world becomes more fully vaccinated and the risks of COVID recede.

Importantly, Booking has built their own robust alternative accommodation business that made up over 20% of total room nights booked prior to COVID and which has been averaging close to 30% of room nights during the pandemic as the drivers of Airbnb’s strong results also support Booking’s business in this area.

As we’ve said in the past, we admire Airbnb’s business, and we would consider investing in the company at the right price. We are confident that Airbnb and Booking can both win. But in the near term, we have not yet gotten comfortable that Airbnb’s long-term plan to go from a barely profitable business to generating fantastic levels of profitability is entirely credible. While they were still running significant losses in 2019 on $4.8 billion in revenue, when Booking was at the same level of revenue about a decade ago, they were already reporting profit margins at the levels that Airbnb says they’ll get to someday.

So, the primary competitive concern for Booking Holdings is whether or not leisure travelers may start to book more of their hotel reservations via a competing third party or by being more likely to book directly with hotels. Honestly, we are just not concerned about other online travel agents. There is nothing particularly new that they are doing that would change the competitive dynamics with Booking. While there are some newer OTAs seeing surges in popularity, that has regularly been the case in the past as well and is just part of the normal competitive industry dynamics. But what we do monitor closely is the Google Hotels search product.

Ensemble Capital discussed Google Hotels in a blog post titled Who’s Scared of Google? Not Booking Holdings, in December of 2019 just a few months prior to COVID. Our contention at the time was that while the Google Hotels search product was very bad news for online travel companies that depended on free organic search results to drive traffic to their sites, Booking Holdings had built their business around paid Google ads. While we said we were monitoring Google Hotels closely, we did not see it having a material negative impact on their business.

So far, our contention appears to have played out as we expected. According to research by Bernstein, 83% of all clicks and 89% of sales inside of Google Hotels are made via paid rather than free listings. And the conversion rate, or the frequency with which a traveler who clicks on a hotel listing completes a reservation, is 65% higher for paid listings.

In addition, Booking focuses on working with independent hotels, rather than the major brands. While the major brands are advertising heavily within Google Hotels, just as they advertise heavily elsewhere, independent hotels in the US are 67% less likely to advertise inside of Google Hotels than their big brand competitors. And in[…]

“Art is the imposing of a pattern on experience, and our aesthetic enjoyment is recognition of the pattern.” – Alfred North Whitehead

If you’ve learned the guitar, you know that most popular music follows similar chord progressions, the most popular being C – G – Am – F. Among the notable songs that follow this pattern are “Let it Be” by the Beatles, “With or Without You” by U2, and “No Woman No Cry” by Bob Marley.

Despite the many potential chord progressions, the C – G – Am – F pattern is particularly pleasing to our ears.

In investing, it’s also helpful to develop an ear for promising patterns. In a given year, the Ensemble research team looks at over 100 companies. Most of the companies are quickly discarded, while others move forward for more serious evaluation.

With time and experience, we have found certain attributes, or patterns, that pique our interest and push certain ideas forward in our research process.

Here are 15 of those patterns and a brief explanation of each.

  • Idiosyncratic businesses. We define idiosyncratic businesses as having uncommon characteristics or straddling two or more industries. Because these companies are not like any others and aren’t easy compartmentalized, industry specialists can have a hard time fully appreciating the opportunity. Ferrari is a classic example. It’s not just an auto company and it’s not just a luxury brand – it’s both. In the case of Ferrari, we believe that being generalists rather than specific industry experts has helped us appreciate Ferrari’s auto and luxury characteristics.
  • Predator and prey cultural advantage. It’s not enough for a company to have a great culture if its closest competitors also have great cultures. We prefer situations where there’s a vibrant culture in industries full of dull cultures. There’s no predator if there’s no prey. Take banking, which historically has had low levels of customer satisfaction. Money is a commodity and customers tend to bank where they can get the best rates. First Republic Bank turned that model upside down by positioning itself as a customer service business that happens to be a bank. Over time, it’s chipped away at established banks’ market shares with high-touch service. For established banks to compete, it would require massive cultural overhauls.

  • A passionate fan base. If a company has a passionate – almost cult-like – group of core followers, it has evangelists producing free advertising. And not just free advertising, the best kind of advertising – social proof. Costco fanatics, for example, are quick to share with friends or their social media networks the tremendous bargains they found at Costco. In turn, you don’t want to miss great deals, so you’re inclined to either join Costco yourself or put your current membership to greater use.
  • No-brainer products. We love coming across products and services where the utility is so obvious that the company’s success appears inevitable with enough time. This is what we saw, for instance, when we saw the clinical data around Masimo’s non-invasive, highly accurate pulse oximetry sensors. Among the benefits were a better patient experience, less stress on nurses and doctors, and reduced costs for the healthcare system.
  • Playing a different game than competitors. Homebuilder NVR’s business strategy is to maximize local market share and to not own land. Most major homebuilders came into being as land developers and so they continue that approach today. They also want to be in the hot markets across the nation. In contrast, NVR options its land, only building when there’s demand, and stays within its core regions in the eastern part of the United States. It may not be the ideal strategy in every type of housing market, but it’s differentiated, and NVR’s operating results indicate that it’s a superior approach across long-term housing cycles.
  • Products you can’t imagine living without. When we think about “staple” products, we typically think about household staples like detergent, tissues, and toothpaste – items we use and consume, regardless of the economy. Yet in our increasingly digital lives, some types of technology are similarly becoming staples. We think Google’s Search and YouTube products, for example, are not discretionary items anymore, but a core part of our digital world.
  • Surviving a moat attack. Companies that have repelled previous threats to their moat provide us with additional confidence in the businesses’ resilience and ability to sustain high returns on invested capital. Most restaurants would have been permanently impaired by the type of bad press Chipotle received following the foodborne illness outbreaks of its own doing in 2016. Yet, even in those dark periods, Chipotle’s average unit volume only fell to the fast casual industry average. Being able to withstand the backlash provided Chipotle an opportunity to regroup and improve its operations.

Source: Piper Sandler, figures in 000s

  • Founder’s pedigree. CEOs – and founders, in particular – set the tone for corporate culture. Leaders that have instilled productive values across the company, from the C-suite to the customer service representative, have set a culture that will last beyond their own tenure. We noticed this when we visited Masimo headquarters at their 2019 investor day. The employees seemed to share co-founder/CEO Joe Kiani’s love for solving tough problems, creating win-win products, and reducing the cost of healthcare.
  • Mission-critical businesses doing what seem to be boring things. Once a business has adopted a piece of software (e.g. Broadridge, ServiceNow) that makes its back-office run smoothly or a supplier that is deeply entrenched in its process (e.g. Fastenal), it’s unlikely to change and potentially disrupt its operations just to save a few dollars. While these mission-critical companies may not make headlines in financial media, they provide a service that day-in and day-out provides value for their customers.
  • Focus on consumer surplus. Customers who are convinced they are receiving tremendous value for their purchases will come back repeatedly. Value doesn’t always equal price but is instead a mix of price and quality. Costco passes on the savings it derives from its scale with members who have, in turn, come to understand – consciously or unconsciously – they are receiving value on each purchase. Similarly, Netflix’s membership prices have intentionally lagged the value being created on the platform through massive investments in content.
  • Sacrificing the present for the future. In a world where investors love to see companies beating quarterly earnings, it’s refreshing to see companies that are less concerned about this or next quarter’s results and are instead thinking about increasing long-term intrinsic value. Rather than maximize short-term results, Old Dominion Freight Lines invests aggressively in its less-than-truckload (LTL) network capacity in all types of markets. Old Dominion’s investments in quality and capacity also allow it to maintain rational pricing with customers when competitors are chasing rates up and down.
  • Positive[…]

Below is the Q3 2021 quarterly letter for the ENSEMBLE FUND (ENSBX). You can find historical Investor Communications HERE and information on how to invest HEREEnjoy!

3Q21 1 Year 3 Year 5 Year Since
Ensemble Fund 3.52% 35.05% 20.91% 20.14% 17.91%
S&P 500 0.58% 30.00% 15.99% 16.90% 15.10%

*Inception Date: November 2, 2015

Performance data represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. Performance data current to the most recent month end are available on our website at www.EnsembleFund.com.

Fund Fees: No loads; 1% gross expense ratio.

On March 20, 2020, the day before the bottom tick of the COVID driven market crash, Ensemble Capital, advisor to the Fund, held a public conference call in which we discussed how it was the tying together of the global economy that had given rise to so much global prosperity and such a massive decline in global poverty. But it was this same interconnectivity that the COVID virus was now using to encircle the globe. You can find a transcript of that conference call here. Today, we want to revisit this theme to discuss why we see so much new value being created in the years ahead, value that our portfolio of companies are helping to develop.

The past few months have made it clear that one of the greatest challenges the world has seen in modern times, a once in a century global pandemic, continues to be very challenging to resolve as new Coronavirus variant waves have continued to spread. It continues to cause great tragedy in the lives lost, numbering over 4.5 million globally and over 700,000 in the US alone and continues to disrupt people’s lives and behaviors the world over.

As with many tragic experiences in life, it is also demonstrating the power of humanity’s ability to rise to great challenges with creativity, ingenuity, and cooperation, both in developing new inventions to solve problems and in our ability to coordinate large groups of people and resources to deal with them. Never before have we been able to design, test, manufacture, and distribute billions of doses of new drugs around the world, all in the span of a year.

In fact, over 6 billion doses of vaccines have been administered globally to nearly 40% of the world population, an amazing feat of modern science and logistics. However, much work remains to be done in vaccinating a substantial proportion of the remaining 60%, without which they and we all remain threatened with the ongoing pandemic that threatens us with new variants selected to try skirting our increasing collective immune defenses.

Fortunately, vaccines have worked remarkably well in preventing severe disease and deaths despite the mutating virus, providing hope for a future where COVID is no longer a widespread health threat. Among populations with the majority of individuals vaccinated, we’ve seen the economic activity of people substantially remain steady despite the new variant driven surges as people have learned to adapt their behaviors in the face of a second year of the pandemic. This is part of the resilience of people and societies we’ve come to observe.

It’s not that humanity has not faced such challenges before. In fact, the effects of deadly infection had been the historical norm prior to modern medicine’s discovery of vaccination and antibiotics as well as innovations that disinfected water and managed sewage. It’s the reason child mortality approached nearly 50% historically regardless of one’s status in life, be it emperor or servant, but has plummeted over the decades.

“Nathan Rothschild was surely the richest man in the world when he died in 1836. But the cause of his death was an infection—a condition that can now be treated with antibiotics sold for less than a couple of cents. Today, only the very poorest people in the world would die in the way that the richest man of the 19th century died.” -Max Roser, Our World in Data

But we have been so privileged to live during a time that benefitted from the invention of modern medicines and public infrastructure that have kept the most pernicious infections at bay for a large majority of the developed world population and growing segments of the developing world.

Modern day social and technological structures are also what allowed billions of people around the world to take shelter at home for weeks while also being able to work and provide for their families. They were able to utilize technological infrastructure that had been built over only the past two decades. The government and monetary responses are also a form of innovation that was able to respond and effectuate actions at a speed and scale that allowed millions of people and businesses to bridge through the Shelter in Place orders without the economic devastation they would have otherwise experienced, compounding the public health tragedy.




Investors should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. The prospectus contains this and other information about the Fund. You may obtain a prospectus at www.EnsembleFund.com or by calling the transfer agent at 1-800-785-8165. The prospectus should be read carefully before investing.

Important Risk Information

An investment in the Fund is subject to investment risks, including the possible loss of the principal amount invested. There can be no assurance that the Fund will be successful in meeting its objectives. The Fund invests in common stocks which subjects investors to market risk. The Fund invests in small and mid-cap companies, which involve additional risks such as limited liquidity and greater volatility. The Fund invests in undervalued securities. Undervalued securities are, by definition, out of favor with investors, and there is no way to predict when, if ever, the securities may return to favor. The Fund may invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. More information about these risks and other risks can be found in the Fund’s prospectus. The Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment.

Distributed by Rafferty Capital Markets, LLC Garden City, NY 11530.

During our third quarter 2021 portfolio update webinar, Ensemble Capital’s Chief Investment Officer Sean Stannard-Stockton and senior investment analysts Arif Karim and Todd Wenning discussed the current market and economic situation. They also discussed two of our holdings, Booking (BKNG) and Landstar (LSTR) at depth, and answered live Q&A at the end of the meeting.

Below is a replay of the full webinar as well as a link to Ensemble Capital’s quarterly letter.

(If you’re viewing this by email, click here to watch the video.)

While our quarterly webinar is an unscripted, more casual discussion, we also produce a quarterly letter that covers the same topics but in written form and with more detail. You can find a copy of our third quarter letter HERE.