Heartland Advisors, an investment management firm, published its “Heartland Value Fund” second-quarter 2021 investor letter – a copy of which can be downloaded here. In the letter, Heartland mentioned that the fund was up double digits for the first half of the year, and its 10 Principles of Value Investing™ continues to lead them to well-managed businesses that are financially strong. 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 Heartland Advisors, the fund mentioned AMC Entertainment Holdings, Inc. (NYSE: AMC) and discussed its stance on the firm. AMC Entertainment Holdings, Inc. is a Leawood, Kansas-based holding company with an $18.3billion market capitalization. AMC delivered a massive 1,631.13% return since the beginning of the year, while its 12-month returns are impressively up by 585.98%. The stock closed at $33.47 per share on August 16, 2021.
Here is what Heartland Advisors has to say about AMC Entertainment Holdings, Inc. in its Q2 2021 investor letter:
“AMC is up a whopping 2,500% since the beginning of the year. Even AMC management seems stunned by the mind-boggling rise in its shares as witnessed by the following quote from a prospectus the company filed to issue more shares.
‘We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last.’
We too don’t believe that prices are tied to valuation metrics for the theater and entertainment company. At current levels, shares of AMC are trading at roughly 63X sales. It’s a steep price for a company that has been losing money for years and isn’t expected to turn a profit in the coming year. No wonder insiders have cashed in on the mania and unloaded over $200 million in stock since March.
Hope is not a strategy
While valuations for AMC are an extreme example, speculative fever is running rampant. Investors have been clamoring to pay premium prices in hopes that the current goldilocks moment of low interest rates, easy sales comparisons and low inflation will go on forever. The appetite for pricey unicorns in a quest for quick gains was a drag on performance for your portfolio, and the Fund modestly underperformed the benchmark for the period.
Despite stratospheric valuations in many areas of the market, attractive valuations still exist if you know where to look. A good place to start is among small caps.
Looking at price to sales metrics, as shown below, smaller businesses are trading at discount levels versus their large counterparts not seen since the dotcom bubble. Price to sales is one of the metrics we look at when examining businesses. Over the years, it has served as an effective tool in identifying compelling opportunities when incorporated with other fundamentals.”
Based on our calculations, AMC Entertainment Holdings, Inc. (NYSE: AMC) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. AMC was in 19 hedge fund portfolios at the end of the first quarter of 2021, compared to 16 funds in the fourth quarter of 2020. AMC Entertainment Holdings, Inc. (NYSE: AMC) delivered a 159.44% 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.
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.
Disclosure: None. This article is originally published at Insider Monkey.
