Greenhaven Road Capital, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. The fund returned approximately -6% net for the third quarter, bringing YTD returns to approximately +14%. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Greenhaven Road Capital, in its Q3 2021 investor letter, mentioned Digital Turbine, Inc. (NASDAQ: APPS) and discussed its stance on the firm. Digital Turbine, Inc. is an Austin, Texas-based software company with an $8.6 billion market capitalization. APPS delivered a 58.95% return since the beginning of the year, while its 12-month returns are up by 162.33%. The stock closed at $89.90 per share on November 2, 2021.
Here is what Greenhaven Road Capital has to say about Digital Turbine, Inc. in its Q3 2021 investor letter:
“When a top five holding starts the quarter at $76 and drops to $48 in a virtual straight line, questions should be asked. This was my July and August with Digital Turbine (APPS). If I liked the stock enough at $76 for it to be a top five holding, I should love it at $48, but Mr. Market was clearly flashing warning signs. While some of you may have enjoyed a carefree summer, I dove back into Digital Turbine to try and figure out what I might be missing and what the market might be missing. I did the best I could to parse every word and action of CEO Bill Stone, connected with dozens of investors, looked at every sell side report and model I could find, studied competitors, and spoke with former employees. There was such a wide gap between my perception of the company and the daily drubbing of its share price, and I was eager to understand if I was missing something or if there was actually a compelling buying opportunity in front of me. I went deep into the weeds, looking at what was said as well as what was unsaid. Over the summer and into the fall, a more detailed mosaic emerged, and I reached three conclusions.
The first is that, after making four acquisitions in a little more than a year, the company has many more moving parts and is very difficult to model at a granular level. Nobody has a robust multi-year model that they have any certainty in. This includes yours truly, who (via the funds) has a large percentage of his family’s net worth invested in APPS, as well as sell-side analysts and even firms that specialize in building financial models for public companies. Digital Turbine’s model has gone from requiring three inputs – phone activations, revenue per phone, and percentage of revenue shared with carriers – to requiring dozens in order to achieve any real detail. The acquisitions each have different drivers, and the company’s new complexity is compounded by the fact that the most recent acquisition closed in Q2. As a result, Digital Turbine has not yet issued one full quarter of reporting with all of the acquired companies included. As best as I can tell, very few investors are letting themselves imagine what the economics will look like if there actually is an industrial logic to these acquisitions – if the companies truly are better combined than as stand-alone entities. To be fair, management was not spoon-feeding investors and was cautious with their public statements, spending months restricting their comments/guidance to saying that operating margins will improve over time. They finally opened up a crack in September, acknowledging that they were tracking 13 areas of potential revenue synergies. The combination of complexity and management conservatism created uncertainty, and many investors sell uncertainty and ask questions later. There was plenty of selling this summer…” (Click here to see the full text)
Photo by Danial Igdery on Unsplash
Based on our calculations, Digital Turbine, Inc. (NASDAQ: APPS) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. APPS was in 30 hedge fund portfolios at the end of the first half of 2021, compared to 22 funds in the previous quarter. Digital Turbine, Inc. (NASDAQ: APPS) delivered a 41.91% 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.
