Steel City Capital, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of 3.2% was recorded by the fund for the second quarter of 2021. Year-to-date, the Partnership gained 11.1%, net. 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 Steel City Capital, the fund mentioned News Corporation (NASDAQ: NWSA), and discussed its stance on the firm. News Corporation is a New York, New York-based media and publishing company, that currently has a $14.3 billion market capitalization. NWSA delivered a 37.73% return since the beginning of the year, while its 12-month returns are up by 92.16%. The stock closed at $24.75 per share on July 23, 2021.
Here is what Steel City Capital has to say about News Corporation in its Q2 2021 investor letter:
“The Partnership added to its position in News Corp. (NWSA) throughout the second quarter. News Corp. owns a portfolio of new- and old-economy media and publishing assets including the Wall Street Journal, Barron’s, and MarketWatch (collectively “Dow Jones”), consumer book publisher HarperCollins, Realtor.com, and a 61.4% interest in publicly-traded REA Group (the Australian version of Zillow/Realtor.com). Stripping out the value of REA Group yields and operating “stub” value of ~$3.6 billion, extraordinarily cheap when considering that in 2007, the company purchased the WSJ for $5 billion and the New York Times trades with a market capitalization of $7.1 billion.
As noted in the Partnership’s 1Q’21 letter (available upon request), a large number of investors tend to balk at such “sum-of-the-parts” stories. Among these naysayers, the most frequent line of questioning focuses on management’s plan to realize value and their targeted timeline. Truth be told, I don’t have a great answer to these questions. But what I do know is NWSA benefits from a controlling shareholder who, in the past, has undertaken corporate actions to extract value from his collection of assets. And at risk of sounding callous, this controlling shareholder is currently 90 years old and his stake in the company will pass to his four eldest children in due time. If nothing else, this type of transition could accelerate the push to break up the company. I’m content to patiently wait given the potential size of the pot.
In the meantime, shares continue to be incomprehensibly cheap. During the trailing twelve-month period, the operating portfolio (again, ex. REA Group) generated ~$750 million of free cash flow. This number will most likely grow over time as the company grows digital subscribers in the Dow Jones portfolio, expands revenue sharing agreements for content from its news properties with the likes of Facebook and Google, executes additional bolt-on
acquisitions at HarperCollins (the consumer publishing industry continues to consolidate), further improves monetization of Realtor.com, and culls ~$100 million of back-office expenses via an ongoing shared-services initiative. Call me crazy, but a world-class media and publishing portfolio with a clear line of site to growth should trade north of 4.8x free cash flow.”
Copyright: wihtgod / 123RF Stock Photo
Based on our calculations, News Corporation (NASDAQ: NWSA) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. NWSA was in 35 hedge fund portfolios at the end of the first quarter of 2021, compared to 32 funds in the fourth quarter of 2020. News Corporation (NASDAQ: NWSA) delivered a -7.20% 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.
