Legacy Ridge Capital Management, LLC recently published its “Legacy Ridge Capital Partners Equity Fund I” second quarter 2022 investor letter, which can be downloaded here. In the first half of 2022, the fund had a gross return of 0.9%. The hike in the Federal Reserve interest rate impacted the fund’s returns. To know about its best picks for 2022, check out the top 5 holdings of the fund.
In the letter, Legacy Ridge Capital Management discussed the fund’s performance. Vistra Corp. (NYSE:VST) is the fund’s top gainer. During the last six months, the share earned approximately 50% in value. Vistra Corp. (NYSE:VST) is a leading electricity and power generation company based in Irving, Texas, and has a market capitalization of $11.052 billion. The stock of Vistra Corp. (NYSE:VST) closed at $24.82 per share on July 28, 2022. On a monthly time frame, Vistra Corp. (NYSE:VST) gained 9.53%, and its 12-month return jumped up to 33.55%.
Here is what Legacy Ridge Capital Management said about Vistra Corp. (NYSE:VST) in its Q2 2022 investor letter:
“However, Vistra Corp. (NYSE:VST) stands out among the names we own. First, the market environment has improved materially over a multi-year basis, which will enhance VST’s ability to mint cash and at the same time underscores the longevity of VST’s asset base. Second, VST’s market value has remained flat, despite shrinking the share count by nearly 15% since adopting a transformational capital allocation strategy. The combination of those two factors results in ~50% more value in a VST share today than just six months ago. The bottom line is that the discount to intrinsic value of VST’s equity has become more attractive than ever. To better understand the two broader points, as well as our heightened conviction, it’s worth providing a brief history of the IPPs and summarizing the original VST investment thesis.
VST is one of three publicly traded electricity companies known as integrated power providers (IPPs), a not so helpful name for an extremely small subgroup of utilities. The IPPs primarily operate two symbiotic business segments: producing wholesale electricity (Generation) and selling that electricity to retail customers (Retail). The IPPs do not own transmission and distribution lines like the larger universe of regulated, investor-owned power companies (Utilities) do. And as such, the IPPs do not earn a regulated rate of return. It’s a gross oversimplification, but investment returns for IPPs were historically almost wholly driven by commodity prices. That’s because IPPs were almost exclusively generation companies without significant retail operations.
The basis for our interest in VST is the company’s ability to generate significant free cash flow, repurchase shares, thereby compounding free cash flow per share over time. With a free cash flow yield of close to 25%, VST could theoretically buy back every outstanding share in four years! But management has been postponing a massive buyback program for years. That changed in late-2020 when the board approved a new capital allocation framework whereby VST intends to repurchase $2B of equity through 2022 and $1B each year from 2023-2025, all while paying $315M in annual dividends. Assuming no growth in earnings (which is what consensus suggests) or any change to valuation, the cash returned to shareholders will average 20% per year through 2025. More importantly, free cash flow per share would compound at more than 16% per year resulting in nearly $8.00 per share by the end of 2025 (VST currently trades at only $22.80!). That’s a shareholder return story that we salivate over and reason enough to make it a large position within the fund…” (Click here to view the full text)
High-voltage power lines. Electricity distribution station. high voltage electric transmission tower. Distribution electric substation with power lines and transformers.
Our research shows Vistra Corp. (NYSE:VST) isn’t on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 40 hedge fund portfolios held Vistra Corp. (NYSE:VST) at the end of the first quarter of 2022 and in the previous quarter. Vistra Corp. (NYSE:VST) shares gained 31.12% of its value over the last 52 weeks.
In February, we published another article on Vistra Corp. (NYSE:VST). If you want to read more investor letters from hedge funds and other leading investors, check out our hedge fund investor letters Q2 2022 page.
Disclosure: None. This article is originally published at Insider Monkey.
