RGA Investment Advisors LLC, an investment management firm, published its “Smead Value Fund” second quarter 2021 investor letter – a copy of which can be downloaded here. In its Q2 2021 investor letter, the fund talked about one of the most important mistakes they made in their investing careers and emphasized the clarity with which they now pursue opportunities. 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 RGA Investment Advisors, the fund mentioned Stitch Fix, Inc. (NASDAQ: SFIX), and discussed its stance on the firm. Stitch Fix, Inc. is a San Francisco, California-based online personal styling service provider, that currently has a $4.4 billion market capitalization. SFIX delivered a -28.58% return since the beginning of the year, while its 12-month returns are up by 78.47%. The stock closed at $44.04 per share on August 11, 2021.
Here is what RGA Investment Advisors has to say about Stitch Fix, Inc. in its Q2 2021 investor letter:
“We purchased a new position–Stitch Fix–which is attacking this problem of abundance and the friction of shopping digitally head on with curation and personalization.
Your Own Personal Clothing Store
Stitch Fix is incredibly interesting. Founded by Katrina Lake in 2011, Stitch Fix turned apparel shopping into a delightfully personalized, subscription-based platform. The company collects numerous data points when onboarding a customer from the generics and quirks of each individual’s size and shape to tastes in designers, colors and styles. This empowers the company’s stylists to curate a “fix” with five clothing items on a periodic cadence (monthly, quarterly, semi-annually, etc.) of the customer’s choosing. A box arrives with its contents formerly unseen by the customer, with the constant being each item is already a known fit based on the size and shape of the customer’s body type and the trove of data Stitch Fix has on other “look alikes” across their customer base. Of the 5 items, a customer can keep all or none, but they must pay $20 irrespective of whether they keep anything. After reviewing the items, a customer can keep all items (for which they would get a 25% keep five discount) or return some items and checkout online to
pay full price.We owe immense gratitude to Mario Cibelli for helping us think through this company the right way (Mario covered the company in depth with Elliot on a recent episode of This Week In Intelligent Investing).
It is a company we first analyzed and found interesting heading into IPO, deploying the same customer lifetime value framework that led us into our Roku position early. Stitch Fix was intriguing and challenging through this lens, because churn is high in the measurable data, making the CLTV of each individual customer very sensitive to small changes in churn. Mario insisted the more appropriate way to think about this company is comparing them to a retailer like Nordstrom. People start their journey with Stitch Fix, buy a bunch of clothes over several months and then shut off the subscription once a
satisfactory portion of their wardrobe has been replenished. Customers reengage once another round of refreshment is needed, but while some churn is the bad kind, not all fits that mold…” (Click here to see the full text)
Photo by John Cameron on Unsplash
Based on our calculations, Stitch Fix, Inc. (NASDAQ: SFIX) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. SFIX was in 28 hedge fund portfolios at the end of the first quarter of 2021, compared to 32 funds in the fourth quarter of 2020. Stitch Fix, Inc. (NASDAQ: SFIX) delivered a -2.23% 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, 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 EV 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.
