Palm Capital, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. Over the three months ending 30 June 2021, our portfolio increased by 12.3% after management fees & trading expenses. Since the fund started, its portfolio has returned 15.2% per annum after management fees & expenses. The fund has outperformed the MSCI World Index by 3.9% per annum while holding better businesses and buying them below their worth. 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 Palm Capital, the fund mentioned KLA Corporation (NASDAQ: KLAC) and discussed its stance on the firm. KLA Corporation is a Milpitas, California-based semiconductor manufacturing company with a $55.8 billion market capitalization. KLAC delivered a 41.30% return since the beginning of the year, while its 12-month returns are up by 89.31%. The stock closed at $369.53 per share on September 24, 2021.
Here is what Palm Capital has to say about KLA Corporation in its Q2 2021 investor letter:
“A final example of our thinking is in the semiconductor industry. Because of the extreme complexity and significant costs in the manufacturing process, the industry has become highly specialised. It has fragmented into three types of companies – the designers of chips, the manufacturers, and those that make equipment for the manufacturers.
Revenue for designers is somewhat stable because of patents. And even when patents expire, designs are not easily copied, and customers don’t easily switch because this would typically involve a redesign of their product and the risk that the new design does not work as well. However, revenue is still dependent on the length of the lifecycle of end products they are used for, how long it takes for those products to be replaced with new technology and the success of designers’ R&D into new designs. So, while near term revenue and profit margins are typically stable, medium to long term revenue and profits are uncertain. And the large customers in this industry such as Apple, Google and Amazon are all beginning to design their own chips, raising this uncertainty…
…On the other hand, revenue and profits for the companies that design and manufacture equipment for the manufacturers are steadier. An example of a company we like in this space is KLA. KLA provides tools and solutions to help manufacturers monitor and improve their highly complex manufacturing process and reduce costs. These are critical services to the manufacturers. Their tools are found in every major manufacturer globally. And the uniqueness of these tools is evidenced by KLA’s market share which is more than four times its nearest competitor. Regardless of which design is successful in the future or which manufacturer manages to take the lead, KLA’s tools will almost certainly still be needed. Its revenues and profits are less affected by technological change and therefore less uncertain that that of the designers and manufacturers.”
Photo by Umberto on Unsplash
Based on our calculations, KLA Corporation (NASDAQ: KLAC) ranks 12th in our list of the 30 Most Popular Stocks Among Hedge Funds. KLAC was in 45 hedge fund portfolios at the end of the first half of 2021, compared to 40 funds in the previous quarter. KLA Corporation (NASDAQ: KLAC) delivered a 13.63% 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 leave no stone unturned when looking for 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 hydrogen fuel cell 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.
