Bretton Fund, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. A return of 17.03% was recorded by the fund for the first half of 2021, beating its Benchmark, the S&P 500 Index, which returned 15.25% for the same period. 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 Bretton Fund, the fund mentioned Alphabet Inc. (NASDAQ: GOOG) and discussed its stance on the firm. Alphabet Inc. is a Mountain View, California-based multinational conglomerate company with a $1.8 trillion market capitalization. GOOG delivered a 57.26% return since the beginning of the year, while its 12-month returns are up by 87.50%. The stock closed at $2,830.02 per share on September 27, 2021.
Here is what Bretton Fund has to say about Alphabet Inc. in its Q2 2021 investor letter:
“Over the past six years of owning Google, one of our minor annoyances as shareholders has been the company’s occasional lack of focus and cost control. It’s hard to tell from the outside with any certainty how “well spent” their ever-increasing costs were. Revenue would reliably increase 20% annually, but in recent years, costs would often increase more than that, leading to shrinking margins and earnings growth that trailed revenue growth. As a long-term investor, we absolutely want the company to be investing back into the business, paying its employees well, creating new products, spending on research, etc., etc. If that results in lower earnings that year, that’s fine. But we often had a nagging feeling that at least some of the rapid spending increases—and side projects— weren’t all that well thought out. Again, it’s hard to tell from the outside, and the core business was so good that the extra spending didn’t really affect our evaluation of the company.
Then something interesting happened in the aftermath of the pandemic. Like a lot of companies, Google cut back as the world went into lockdown. Advertisers reeled in campaigns. As advertising came back in a major way this year, Google’s spending was still restrained, resulting in revenue increasing 32% in the first quarter, while pretax earnings doubled. In the fourth quarter last year, we saw the same thing: revenue increased 23% while pretax earnings went up 69%. Spending will come back—as it should—but seeing how much revenue was able to increase with minimal cost increases gives us more assurance that Google is a great business. Not all companies can do that. Their stock rose 21% in the second quarter, contributing 2.1% to performance.”
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Based on our calculations, Alphabet Inc. (NASDAQ: GOOG) ranks 7th in our list of the 30 Most Popular Stocks Among Hedge Funds. GOOG was in 155 hedge fund portfolios at the end of the first half of 2021, compared to 159 funds in the previous quarter. Alphabet Inc. (NASDAQ: GOOG) delivered a 9.43% 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.
