L1 Capital, an investment management firm, published its ‘L1 Long Short Fund Limited’ second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly net return of 8.8% was recorded by the fund in the second quarter of 2021, extending its gain to 72.9% (net) over the past year. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
In the Q2 2021 investor letter of L1 Capital, the fund mentioned Wells Fargo & Company (NYSE: WFC) and discussed its stance on the firm. Wells Fargo & Company is a San Francisco, California-based financial services company with a $194 billion market capitalization. WFC delivered a 56.61% return since the beginning of the year, while its 12-month returns are up by 107.03%. The stock closed at $45.85 per share on September 21, 2021.
Here is what L1 Capital has to say about Wells Fargo & Company in its Q2 2021 investor letter:
“Wells Fargo (Long +16%) was the strongest contributor to portfolio performance over the quarter. Wells Fargo shares rallied given a better outlook for bad debts driven by improving employment and house price trends. The company had been very undervalued due to excessive fears around likely bad debts due to the pandemic, the continued regulatory “asset cap” (a punishment that was put in place in 2017 for numerous compliance failures) and an inability to commence buybacks. The share price has subsequently recovered strongly in recent months as the company has progressed its turnaround program under the leadership of the well-regarded CEO, Charles Scharf (former CEO of Visa and BNY Mellon). Wells Fargo is now closer to getting the asset cap lifted and has announced a huge cost out program (US$8b+) as well as an $18b buyback program to be completed over the next 12 months. Wells Fargo shares have rallied more than 50% since we initiated the position in late 2020. Given the strong rally, we elected to exit our position and rotate into stocks with larger valuation upside.”
Based on our calculations, Wells Fargo & Company (NYSE: WFC) ranked 23rd in our list of the 30 Most Popular Stocks Among Hedge Funds. WFC was in 94 hedge fund portfolios at the end of the first half of 2021, compared to 96 funds in the previous quarter. Wells Fargo & Company (NYSE: WFC) delivered a 7.62% 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.
