Diamond Hill Capital’s Top 10 Stock Picks

7. SS&C Technologies Holdings, Inc. (NASDAQ:SSNC)

Value of Diamond Hill Capital’s 13F Position (9/30/2024): $564 million

Number of Hedge Fund Shareholders (9/30/2024): 58

Hedge funds took renewed interest in SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) during the third quarter, as the number of funds long SSNC jumped by 38%. Joe Milano’s Greenhouse Funds and Dmitry Balyasny’s Balyasny Asset Management were among the many funds to add SSNC to their 13F portfolios during the quarter.

SS&C Technologies Holdings, Inc. (NASDAQ:SSNC), a provider of financial services software, grew organic revenue by 6.4% in Q3, the first time in three years it’s achieved 6% organic growth in consecutive quarters. Adjusted earnings per share also jumped by 10.1% to $1.29 in the latest quarter.

Hedge funds appear to be increasingly bullish on the company’s strong recurring revenue stream (80%), its diversified portfolio of software solutions, and its low leverage, which could allow it to fund further acquisitions. SS&C completed its $670 million acquisition of Battea-Class Action Services at the end of Q3, adding a market-leading provider of settlement recovery services to its portfolio.

Giverny Capital Asset Management sold off SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) late last year primarily due to one major mistake, as the fund reported in its Q4 2023 investor letter:

“It’s a bit like two neighbors, both young and with excellent incomes. If one diligently saves a good portion of their income, dollar cost averages regularly into the stock market, pays a little extra on the mortgage every month and avoids credit card debt, while the other dabbles in exotic investments, is on a first-name basis with a local bookie and maxes out credit cards at the holidays, we have a pretty good idea which household will be richer at age 65, no matter who earns more money over their careers.

It’s the same for companies. Earnings power matters, but not more than capital allocation. I thought about this for a while and sold SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) in the third quarter. This is a fine business with a history of making smart acquisitions. But recently the decision to use floating rate debt to finance acquisitions when interest rates were at historical lows has been a costly mistake. SS&C is growing modestly, but its earnings are stagnant because incremental cash flow must be dedicated to higher interest charges.

Selling SS&C and Markel, which were each about 4% of the portfolio, was not easy for me. Both businesses trade for reasonable prices and have good competitive positions. They have strong CEOs who have been in the job for many years. CEO Bill Stone founded SS&C and is a billionaire thanks to his own decisions. Tom Gayner at Markel is a well-regarded stock market investor and a much-admired leader.”