Arch Capital Management, an investment management firm, published its fourth-quarter 2021 investor letter – a copy of which can be downloaded here. Through the first 11 months of the partnership, the fund was able to deliver a 3.53% return, compared to the S&P 500 Total Return Index, its core benchmark, which returned 30.02% for the same period. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.
Arch Capital, in its Q4 2021 investor letter, mentioned Nelnet, Inc. (NYSE: NNI) and discussed its stance on the firm. Nelnet, Inc. is a Lincoln, Nebraska-based financial services company with a $3.3 billion market capitalization. NNI delivered a -10.45% return since the beginning of the year, while its 12-month returns are up by 21.91%. The stock closed at $87.47 per share on January 31, 2022.
Here is what Arch Capital has to say about Nelnet, Inc. in its Q4 2021 investor letter:
“Nelnet is our third-largest holding, sitting just below Spotify as of this writing. Nelnet is a small-cap conglomerate headquartered in Lincoln, Nebraska with a market cap just north of $3 billion.
The company is in a unique situation, as it used to be a major student loan originator, holding loans on its balance sheet that would generate steady amounts of cash flow. However, around a decade ago the federal government took all student loans in-house, leaving Nelnet unable to originate new loans. Since student loans are very long-term, Nelnet still has billions of loans sitting on its balance sheet, which generates cash for the company.
With that cash, Nelnet management has greatly diversified the business. These include three wholly-owned subsidiaries (loan servicing, education technology, and Nelnet bank) and many minority investments with a focus on venture capital, real estate, and solar energy. We won’t go through the details of our analysis here, but if you ex-out minority investments (most of which are held at cost and likely undervalued on the balance sheet) and cash, Nelnet has a free cash flow yield of ~18%.
To be clear, a lot of the source of current cash generation will run dry as the student loan book winds down over the next decade. But with management’s track record of capital allocation that has seen book value per share grow at 17.3% through the end of 2020 (a relevant metric for a financial/investment company), we are confident the value of this business will grow despite the student loan business winding up.
At such a high free cash flow yield and with seasoned capital allocators at the helm, we are very comfortable holding a large position in Nelnet stock. Unless shares get egregiously overvalued, this is a compounder we can own for many, many years.”
Research, Investment, Finance
Our calculations show that Nelnet, Inc. (NYSE: NNI) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. NNI was in 14 hedge fund portfolios at the end of the third quarter of 2021, compared to 14 funds in the previous quarter. Nelnet, Inc. (NYSE: NNI) delivered a 5.12% return in the past 3 months.
You can find other letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q4 page.
Disclosure: None. This article is originally published at Insider Monkey.
