Bumbershoot Holdings LP, an investment management firm, published its fourth quarter 2020 investor letter – a copy of which can be downloaded here. Bumbershoot Holdings L.P. generated a negative gross return of -6.61% for the full-year 2020, while its S&P 500 benchmark delivered a 16.26% return in the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Bumbershoot Holdings LP, in their Q4 2020 investor letter, mentioned KVH Industries, Inc. (NASDAQ: KVHI) and shared their insights on the company. KVH Industries, Inc. is a Middletown, Rhode Island-based communications equipment company that currently has a $245.1 million market capitalization. Since the beginning of the year, KVHI delivered a 17.18% return, extending its 12-month gains to 45.04%. As of April 07, 2021, the stock closed at $13.30 per share.
Here is what Bumbershoot Holdings LP has to say about KVH Industries, Inc. in their Q4 2020 investor letter:
“Similar to the past couple of years, I’d like to take this opportunity to provide partners with a “case study” on a couple of the fund’s investments.
First is KVH Industries (KVHI:NGS), a Core top-10 position since 2017. This will be my first time publicly detailing the investment thesis.
KVH is a gyroscope business.
More specifically it is a fiber-optic gyroscope business; and even more than that it’s an antenna manufacturer, telecommunications service provider, military defense contractor, and a huge swing on the internet of things and autonomous driving technology…
To understand the full extent of the description above requires a look into KVH’s history. Headquartered in Rhode Island, the company has a long history related to sailing. It created a digital compass in the early 80s, which formed deep ties within the maritime industry. Combining sensor and autocalibration technologies— along with a core competency in fiber-optic gyroscopes —it eventually introduced the TracVision antenna in the mid-1990s.
These are the giant domes you might be familiar with if you’ve ever looked at a cargo ship or yacht. What’s happening inside the dome is a bit of magic based on a “stabilized antenna.” In effect, it is using super high precision (fiber-optic) gyroscopes to measure angular momentum across a specific axis. It can take this info and use it to reorient itself—in order to stay connected
with a satellite while bouncing around on the water.KVH had eventually built a huge coverage network for its products over the course of many years to become a leading service provider. But now the service sailors require is internet.
This is KVH’s core business; and if I’m right about the company… it is the Verizon of the ocean. If I’m wrong… it’s maybe more like the T-Mobile.
The company is vertically integrated on almost every step of the provider network up to the satellite. This includes the antenna, communications box & network management services, coverage network, etc. It is not a satellite operator though—which is actually a highly competitive industry. It partners with satellite owners to create a coverage network, much the same way any wireless service provider would to establish a broader terrestrial coverage area through towers.
While the global satellite communications market for the maritime industry has been growing, a new phase of growth has long been awaited as part of an upgrade cycle in bandwidth. Mobile devices communicate via radio frequency (RF) waves; and just like the upgrade cycle from 4G to 5G in cellphones, the satellite market has been waiting for high-throughput satellites (HTS). This is an upgrade cycle from low frequency C- and L-bands to the higher frequency Ka- and Ku-bands. This is akin to going from dial-up to cable. Or maybe more like AM to FM in radio…
This matters though because speed makes all sorts of new capabilities/applications become available. Data usage on the seas is historically scant—and expensive! But think about operating data, training videos, email and texting, streaming movies, etc. The amount of data generated will become more intensive; and the total number of ships/users will also increase dramatically.
Besides speed, cost was always the other major hurdle to adoption. To take the up-front cost factor out of the equation, KVH borrowed a page from Apple’s playbook by offering a “subscription” model. This is AgilePlans, which KVH unveiled as its “connectivity-as-a-service” (CaaS) offering that launched in 2018; and it has been gaining traction with customers ever since.
While today, connectivity is viewed as a major part of crew welfare and retention, in the future it is likely to also be about synthesizing data into intelligence. This is what KVH has started to address through maritime IoT solutions such as KVH Watch for remote monitor of onboard equipment and integrated IoT Inside in all VSAT terminals.
The satellite communications market for the maritime industry has a long way to go to develop into what it is ultimately likely to become. KVH is very likely to grow along with it, transforming into a much larger business in the process.
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Besides the main maritime communications business, KVH has similarly taken the core fiber-optic gyroscope technology and vertically integrated it into some other unique applications. Chief among these is a sensor known as an inertial measurement unit (IMU). It then further incorporates these into an inertial navigation system known as TACNAV 3D.The navigation & positioning capabilities are used for various military applications such as unmanned aerial devices/drones, homing devices, etc. Particularly cases where GPS is unavailable/undesirable. While this has never been a huge business for the company, the Army has made assured positioning, navigation and timing (A-PNT) one of its six modernization priorities to try to reduce reliance on GPS. Without committing to any formal targets, it is likely to add to growth over time.
In addition, IMUs are used in conjunction with LiDAR systems, which is a foundational part of autonomous driving programs. While this is not on the immediate horizon; and perhaps more importantly is not needed to underwrite a highly positive investment outcome… nonetheless, it could be a substantial opportunity.
Microelectromechanical system (MEMS) gyros like the ones used in cell phones are questionable in terms of whether they provide a high enough level of precision. KVH has been attempting to drive down the cost of its fiber-optic solutions; and it ultimately may come down to which can improve faster—cost vs. performance.
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In either case, with the key maritime communications business set to get to scale, KVH’s story is likely to get very interesting over the next couple of years. Despite its relatively small market cap, what differentiates the company as a Core investment is the belief that it has the ability to write its own growth story and control its own destiny, independent of broader macro trends. It is actually pretty amazing to me how secure a position the company has carved out for as small a market-cap size as it is awarded. That might be ready to change.It would seem KVH’s time has finally arrived.
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Bumbershoot purchased our initial stake in KVHI in the summer of 2016, establishing a bookmark position of only ~5bps. We added significantly to the position in early 2017, building it to approximately ~200bps by mid-year. We took an additional ~100bps of exposure in mid-2018; and similarly added to it again in 2019. All told, it tallied to roughly ~425bps position at cost with an “adjusted” basis of ~$9.45/share, less some minor realized trading profits. Allocated as part of our Core category, this placed it as a top-10 position within the overall fund heading into this year.Turning to the company’s financials, KVH presents a bit of a challenge. The switch to a service model rather than a hardware sale, combined with the impact from COVID-19 and sale of its VideoTel division has led to somewhat of a GAAP enigma. Despite the AgilePlans offering continuing to show strong growth in adoption, it hasn’t registered on the income statement. Most of the benefit comes from ratably recognizing the “sale” of hardware through subscription revenue over time— and cash flow should build as a larger installed base leads to high incremental margins at scale.
The company is well capitalized to bring it to the next level. The balance sheet includes roughly ~$40m cash and no debt, aside from ~$7m in paycheck protection program (PPP) loans which it expects to be forgiven.
The company also owns its corporate headquarters in Middletown, RI, where it manufactures all its products related to satellite connectivity. It also owns a facility outside Chicago, IL to manufacture the specialty fiber for the gyroscopes & inertial navigation products.
Shares are heavily owned among a handful of steady institutional investors including Needham, Blackrock, Dimensional Fund, Systematic Financial, and Vintage Capital. Between those five firms and management it represents roughly ~50% of the float.
A slight detractor to last year’s performance, because I’m a “deliberate” writer and this letter is a few weeks delayed, KVH has already produced meaningful gains to start 2021. I expect more to come.”
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Our calculations show that KVH Industries, Inc. (NASDAQ: KVHI) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, KVH Industries, Inc. was in 4 hedge fund portfolios. KVHI delivered an 8.66% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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