Argosy Investors, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A portfolio return of 16.5% was recorded by the fund for the second half of 2021, while the S&P 500 by comparison returned 15.3%. 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 Argosy Investors, the fund mentioned Ferguson plc (NYSE: FERG), and discussed its stance on the firm. Ferguson plc is a Wokingham, United Kingdom-based plumbing and heating products distributor, that currently has a $31.4 billion market capitalization. FERG delivered a 19.12% return since the beginning of the year, extending its 12-month returns to 54.56%. The stock closed at $141.11 per share on August 03, 2021.
Here is what Argosy Investors has to say about Ferguson plc in its Q2 2021 investor letter:
“I generally like the distribution business, particularly when it is a many-to-many market structure. The two “many’s” are suppliers and customers. When there are many suppliers and many customers, neither one has significant negotiation power, and there is a natural role for a distributor that can aggregate the supply of suppliers and aggregate the demand of customers all in one place. Some of the best businesses of the last 20 years have been distributors. Companies like Home Depot and Lowe’s in home improvement, Pool Corp in pool supplies, Watsco in HVAC distribution, and SiteOne in Landscape Supply are just a couple of examples of strong distributors in their respective niches. The challenge with all of these businesses is everyone already appreciates the strengths of their businesses, as reflected in their valuations. Many trade for over 30x FCF, while FERG trades at 23x.
I believe Ferguson deserves to be among that list of distributors in at least some of its focus areas shown below. They have significant market power within many of the segments in which they compete, with >20% market share in several segments, and opportunity to grow in others. There will be opportunity for them to consolidate even more in the U.S. market in the future. Ferguson provides products from over 39,000 suppliers each year, satisfying one of the criteria of a many-to-many distributor. Ferguson usually sells to the contractor customer, and Ferguson states that contractors tend to work within 20 miles of their home base. There are tens of thousands of contractors around the U.S. who visit Ferguson, so I believe Ferguson meets the criteria for being included on the list above, qualitatively.
Quantitatively, FERG’s returns on net tangible assets are competitive with this rarefied group of companies. There is no reason why they should trade at a discount to the rest of this group of great businesses.
The final piece to the puzzle for us is their balance sheet, which is in great shape. They have approximately zero net debt and have been actively buying back shares since beginning trading on U.S. markets. We believe starting from about 20x FCF, growing revenues at 6-7% annually (4% organic and 2-3% via acquisition) growing FCF’s at low-teens rates and returning excess capital via dividends and/or buybacks, we can earn mid-teens returns over time.”
Suwin/Shutterstock.com
Based on our calculations, Ferguson plc (NYSE: FERG) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. FERG was in 5 hedge fund portfolios at the end of the first quarter of 2021. Ferguson plc (NYSE: FERG) delivered an 8.80% 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.
