Palm Capital, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. Over the three months ending 30 June 2021, our portfolio increased by 12.3% after management fees & trading expenses. Since the fund started, its portfolio has returned 15.2% per annum after management fees & expenses. The fund has outperformed the MSCI World Index by 3.9% per annum while holding better businesses and buying them below their worth. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Palm Capital, the fund mentioned Waters Corporation (NYSE: WAT) and discussed its stance on the firm. Waters Corporation is a Milford, Massachusetts-based analytical laboratory instrument manufacturing company with a $23.2 billion market capitalization. WAT delivered a 52.82% return since the beginning of the year, while its 12-month returns are up by 95.62%. The stock closed at $393.58 per share on September 24, 2021.
Here is what Palm Capital has to say about Waters Corporation in its Q2 2021 investor letter:
“We also don’t invest in pharmaceutical companies. While revenue and profits are protected by patents, their future revenue depends on how quickly their drugs are copied once they fall off patent and the success of their R&D. Both are unpredictable.
Instead, we prefer to invest in companies that sell testing equipment and related consumables to the industry. Waters, for example, is a share that we have watched for years and would like to invest in at the right price. The company’s instruments are critical to the production and development of drugs and are the gold standard in the industry. Furthermore, they are often included in the patent applications of customers. This trust and reputation take years to build, resulting in high profit margins. At the same time, it also means that even when a drug of their customer falls off patent, the manufacturers of the generic version are likely to continue using the same instruments as these were already approved in the original application. So, the company’s revenues and profits are less dependent on patent cliffs or the success of R&D than those of pharmaceutical companies.”
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Based on our calculations, Waters Corporation (NYSE: WAT) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. WAT was in 40 hedge fund portfolios at the end of the first half of 2021, compared to 34 funds in the previous quarter. Waters Corporation (NYSE: WAT) delivered a 9.93% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
