Headwaters Capital, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of 2.8% was recorded by the fund for the third quarter of 2021, outperforming the Russell Mid Cap Index that delivered a -0.9% return for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Headwaters Capital, in its Q3 2021 investor letter, mentioned Transcat, Inc. (NASDAQ: TRNS) and discussed its stance on the firm. Transcat, Inc. is a Rochester, New York-based industrial process instruments manufacturer company with a $518.7 million market capitalization. TRNS delivered a 99.31% return since the beginning of the year, while its 12-month returns are up by 137.61%. The stock closed at $69.12 per share on October 8, 2021.
Here is what Headwaters Capital has to say about Transcat, Inc. in its Q3 2021 investor letter:
“Buys: Transcat (“TRNS”)
Transcat (“TRNS”) – Behind the Scenes Enabler of Instrument Precision
Summary Thesis
1) Recurring service revenue from regulatory mandated instrument calibrations. Market growth in the midsingle digits combined with market share gains support high single digit organic revenue growth.
2) Preferred industry acquirer with ample M&A opportunities and financial capacity for transactions leads to double digit total revenue growth.
3) Margin expansion via software enabled productivity improvement.
4) Management experience in the industry.
Company Overview
Transcat (“TRNS”) provides accredited inspection and calibration services for test and measurement instruments primarily in the life sciences and industrial industries. TRNS serves clients in industries where instrument inspection is highly regulated by governing bodies (e.g. FDA, FAA) and where the cost of equipment failure is high. Calibration and testing services generally encompass temperature, pressure, flow and electrical variables of the equipment and instruments used in the manufacturing processes of their clients. As an example, consider an instrument that is used as a measurement tool in the pharmaceutical manufacturing process. The FDA requires high precision from this instrument and, as such, requires that the instrument be tested for precision at regular intervals (typically ranges from 3 -24 months). This creates a steady stream of regulatory mandated recurring service revenue for TRNS. In addition to inspection and calibration services, TRNS is also a distributor of testing equipment. The distribution segment serves as a valuable lead generation pipeline for future service revenue, but is unlikely to be a growth vector for TRNS as the company is solely focused on growing higher margin service revenues. Representative customers include Merck, Johnson & Johnson and Parker Hannafin…” (Click here to see the full text)
goodluz/Shutterstock.com
Based on our calculations, Transcat, Inc. (NASDAQ: TRNS) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. TRNS was in 21 hedge fund portfolios at the end of the first half of 2021, compared to 17 funds in the previous quarter. Transcat, Inc. (NASDAQ: TRNS) delivered a 9.37% 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, we like undervalued, EBITDA-positive growth stocks, so we are checking out stock pitches like this biotech 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.
