Third Avenue Management, an investment management firm, published its “Small-Cap Value Fund” second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio return of 1.92% was recorded by the fund for the second quarter of 2021, below the Russell 2000 Value Index that delivered a 4.56% gains for the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Third Avenue Management, 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 movie theater chain, that currently has a $12.3 billion market capitalization. AMC delivered a 1,644.81% return since the beginning of the year, while its 12-month returns are up by 824.75%. The stock closed at $24.65 per share on July 24, 2021.
Here is what Third Avenue Management has to say about AMC Entertainment Holdings Inc. in its Q2 2021 investor letter:
“There were many interesting and unusual events in the market during the second quarter that captivated investors’ attention. One example is the meme stock saga surrounding AMC Corporation. AMC is a nationwide operator of movie theatres which fell on hard times due to the emergence of home video and the pandemic. In normal times, the existential threats facing AMC would be profound. In the current environment where capital is plentiful and cost of capital is negligible, AMC thrived. AMC management leaned into the liquidity glut and was richly rewarded. Everyone appears to be getting a trophy these days!
AMC is a surreal example of how fiscal and monetary stimulus have distorted financial markets. Despite consistently burning cash, AMC was able to raise equity capital causing its shares outstanding to rise from 100 million at the end of 2019 to more than 500 million currently. In normal times, the impacts of these actions would generally be devastating for shareholders. In today’s distorted investment environment, the rewards were astounding. AMC’s share price rose from $10/share to over $50/share in 2021, growing its market capitalization to over $26 billion despite massive shareholder dilution. For small-cap value managers like ourselves who do not own AMC shares, this was especially painful as AMC is now the largest position in the Index.
AMC was not alone raising equity capital. The two charts to the right illustrate the excesses in equity markets. The first shows the explosion in equity issuance since the pandemic began. The second is more striking as it illustrates how unprofitable companies have been the largest abusers of equity raising largesse.
We will refrain from speculating on how long these conditions will last. On the other hand, we are not participating in the folly either. We are invested alongside you and refuse to take unreasonable risks for short-term gains if it comes at the expense of long-term returns.”
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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, compare to 16 funds in the fourth quarter of 2020. AMC Entertainment Holdings Inc. (NYSE: AMC) delivered a 264.07% 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, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 10 best battery 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.
