Headwaters Capital Management, an investment management company, released its second-quarter 2024 investor letter. A copy of the letter can be downloaded here. It was a calm period for the market compared to the last three years. The fund returned +1.3% (+1.1% net) in the second quarter compared to a -3.4% fall for the Russell Mid Cap Index. The company focuses on investing in companies with a competitive edge, strong cash flow, and extended growth prospects. In addition, you can check the top 5 holdings of the fund to know its best picks in 2024.
Headwaters Capital Management highlighted stocks like Inspire Medical Systems, Inc. (NYSE:INSP), in the second quarter 2024 investor letter. Inspire Medical Systems, Inc. (NYSE:INSP) is a medical technology company, focuses on the development and commercialization of minimally invasive solutions for patients with obstructive sleep apnea. The one-month return of Inspire Medical Systems, Inc. (NYSE:INSP) was -16.69%, and its shares lost 57.41% of their value over the last 52 weeks. On July 12, 2024, Inspire Medical Systems, Inc. (NYSE:INSP) stock closed at $138.89 per share with a market capitalization of $4.127 billion.
Headwaters Capital Management stated the following regarding Inspire Medical Systems, Inc. (NYSE:INSP) in its Q2 2024 investor letter:
“Top Detractor: Inspire Medical Systems, Inc. (NYSE:INSP) -38%: Q2 was a difficult quarter for Inspire on seemingly every front. After a strong rebound for the stock during Q4 ’23 and Q1 ’24, the stock gave back all of those gains as growth concerns re-entered the narrative. INSP’s Q1 results showed utilization at existing centers plateauing, which has led to concerns about the ultimate market opportunity for the company. Additionally, clinical trial results from Eli Lilly’s weight loss drug, tirzepatide, showed evidence that the drug could effectively treat sleep apnea, leading to further concerns about the long-term patient opportunity for INSP. Adding even more pressure to the stock is the reality that a competing product is likely to obtain FDA approval in the next 12 months. Changes to a key insurer’s coverage policy and poor management messaging during the quarter compounded the issues above.
Stepping back from these narratives, the only real concern I have with INSP is the plateauing utilization at existing centers. Utilization by existing physicians has hit a temporary ceiling given the time required to implant the device and allocated OR time by doctors. However, the company can drive improved utilization with the introduction of the Company’s 5th generation device, Inspire V, which should gain FDA approval by the end of 2024. The new device reduces the implant time from 1.5 hours to 1 hour, which will enable existing surgeons to complete more implants per OR day. Inspire V also makes the surgical procedure much easier for surgeons, which should drive greater surgeon adoption in addition to improved utilization. Given that the device won’t be commercially available until early 2025, near-term results for INSP are unlikely to improve. As I detailed in the Q3 ’23 letter, I’m less concerned about weight loss drugs given that the net impact of losing/adding patients at the bottom/top of the patient funnel is likely to be neutral to positive for the company, although there could be a temporary disruption to patient flow as consumers trial the new drugs. I expect the competing product to have minimal impact on INSP and the insurance coverage will prove to be a temporary headwind. INSP’s current valuation embeds many of these concerns and ignores the fact that the company is still growing at +20% annually with improving profitability. Med tech assets with these financial attributes and a TAM as large as sleep apnea have historically traded at much higher multiples. As a result, we continue to own the stock and will patiently endure these growing pains as we await more positive results next year.”
A medical professional performing a minimally invasive procedure while using the company’s technology.
Inspire Medical Systems, Inc. (NYSE:INSP) is not on our list of 31 Most Popular Stocks Among Hedge Funds. As per our database, 38 hedge fund portfolios held Inspire Medical Systems, Inc. (NYSE:INSP) at the end of the first quarter which was 46 in the previous quarter. In the first quarter, Inspire Medical Systems, Inc. (NYSE:INSP) generated revenue of $164 million, which represents a 28% increase compared to Q1 2023. While we acknowledge the potential of Inspire Medical Systems, Inc. (NYSE:INSP) 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 another article, we discussed Inspire Medical Systems, Inc. (NYSE:INSP) and shared The Brown Capital Management Small Company Fund’s views on the company in the previous quarter. Headwaters Capital Management stated in the Q1 2024 investor letter that Inspire Medical Systems, Inc. (NYSE:INSP) underperformed the broader market during the quarter. 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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