Laughing Water Capital, an investment management company, released its second-quarter 2024 investor letter. A copy of the letter can be downloaded here. In the second quarter, Class A interests in Laughing Water Capital returned about 2.5% bringing year-to-date returns to 11.1%. The SP500TR and R2000 returned 4.3% and -3.3% in the second quarter and 15.3% and 1.7% year-to-date, respectively. The strength of the market is now concentrated in a small number of mega-cap stocks. The SP500’s “artificial intelligence”-related equities increased 14.7% during the second quarter, while the overall SP500 fell 1.2%. The firm does not own any of these stocks and focuses on the hidden corners of the market. In addition, you can check the fund’s top 5 holdings to determine its best picks for 2024.
Laughing Water Capital highlighted stocks like Xponential Fitness, Inc. (NYSE:XPOF), in the second quarter 2024 investor letter. Xponential Fitness, Inc. (NYSE:XPOF) is a North America-based boutique fitness franchisor. The one-month return of Xponential Fitness, Inc. (NYSE:XPOF) was 12.65%, and its shares lost 11.05% of their value over the last 52 weeks. On July 25, 2024, Xponential Fitness, Inc. (NYSE:XPOF) stock closed at $17.46 per share with a market capitalization of $838.028 million.
Laughing Water Capital stated the following regarding Xponential Fitness, Inc. (NYSE:XPOF) in its Q2 2024 investor letter:
“Xponential Fitness, Inc. (NYSE:XPOF) – Xponential fitness is a franchisor of boutique fitness concepts including Club Pilates, Pure Barre, Stretch Lab and others. The stock was previously a stock market darling, having nearly tripled from the 2021 IPO through 2023 highs, but then became the subject of a well-regarded short seller at this time last year, causing shares to plummet. The short report focused on 1) questioning the integrity of XPOF’s CEO, and 2) cherry picking commentary from unhappy franchisees in select verticals to imply that the entire business was at risk. In May, XPOF’s CEO was removed, causing shares to plummet, and I purchased our position on this weakness.
Generally speaking, being a franchisor is a very good business, which explains why franchisors often trade at 20x EBITDA or more. At the time of the decline, if one assumed that every single franchisee had financed 75% of their franchise with debt, and then sued XPOF to recover this liability and won, I estimated that XPOF would have been trading at 12.5x their guidance for 2024 adjusted EBITDA. The idea that every single franchise would sue was extremely farfetched because first, many franchisees own more than one franchise, and it is unlikely this would be true if they were unhappy with their first franchise. Second, information on franchisee/franchisor litigation is widely available, and through 2023 XPOF averaged less than 2 conflicts per 1,000 units. Importantly, Club Pilates – XPOF’s crown jewel – had zero lawsuits. Further, I believed that Club Pilates by itself could be worth more in a private sale than the price that public markets ascribed to the entire portfolio of concepts….” (Click here to read the full text)
A group of people in the fitness studio doing a yoga or pilates class.
Xponential Fitness, Inc. (NYSE:XPOF) is not on our list of 31 Most Popular Stocks Among Hedge Funds. Xponential Fitness, Inc. (NYSE:XPOF) was held by 26 hedge fund portfolios at the end of the first quarter, compared to 22 in the previous quarter, according to our database. The first-quarter consolidated revenue of XPOF for 2024 was $79.5 million, reflecting a 12% year-over-year increase. While we acknowledge the potential of Xponential Fitness, Inc. (NYSE:XPOF) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
In addition, please check out our hedge fund investor letters Q2 2024 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.
