Investment management company Laughing Water Capital released its second quarter investor letter 2022, a copy of the same can be downloaded here. In the second quarter, the fund returned -19.4%, which brings the year-to-date return to -29.5%. The letter discussed the reasons for the underperformance of its portfolios. S&P 500 & Russell 2000 underperformed in the second quarter and returned -16.1% and -17.2%, respectively. You can check the top 5 holdings of the fund to see its best picks in 2022.
In the Q2 2022 investor letter, Laughing Water Capital analyzed the current events in the market and pointed out how they affected its portfolios. The fund discussed the stocks like Whole Earth Brands, Inc. (NASDAQ:FREE). Whole Earth Brands, Inc. (NASDAQ:FREE) is a food company based in Chicago, Illinois has a market capitalization of $225.489 million. The stock of Whole Earth Brands, Inc. (NASDAQ:FREE) closed at $ 5.38 per share on July 29, 2022. Whole Earth Brands, Inc. (NASDAQ:FREE) had a return of -14.33% for the past month, and its 12-month return dropped to -57.47%
Here is what Laughing Water Capital specifically said about Whole Earth Brands, Inc. (NASDAQ:FREE):
“Whole Earth Brands, Inc. (NASDAQ:FREE) – Whole Earth, our alternative sweeteners business, currently trades around 6-7x my estimate of normalized FCF, versus packaged food peers at more than 20x. To be fair, the company has somewhat painted themselves into a corner as they have been pitching themselves as an M&A growth story, but after ~doubling revenue over the last 2 years, at present the balance sheet is full, and they do not have the equity cost of capital needed to continue to pursue M&A with equity. Thus, the revenue growth story is on hold (although their category should grow faster than other packaged foods), which combined with some inflationary pressures has led to shares being punished. From my perspective, a stalled growth story is not great, but it is better than a continued growth story that is based on value destroying dilutive equity transactions: management deserves some credit for being disciplined. Further, debt paydown is a totally reasonable strategy to build equity value. The company is presently rebuilding the balance sheet, which at some point will likely be fire power for future M&A.
Putting the balance sheet aside, perhaps the most notable recent development is Martin Franklin bought ~14% of the equity during the quarter. No one is infallible, but at the very least it is curious to note that the last time Martin Franklin and FREE’s Chairman Irwin Simon worked together it was at Jarden Corporation, where Franklin compounded capital at 30% a year for 15 years before selling the business. Again, there is no guarantee here that history will rhyme, but a low starting valuation is a prerequisite for that sort of compounding, so we are starting from a good place. How cheap does a stock have to be to partner with people that have an incredible history of buying and building businesses? Should we wait for 4x or 5x normalized FCF? Or should we plow ahead at 6-7x and just acknowledge that the road forward will have plenty of speed bumps?”
Nejron Photo/Shutterstock.com
Even though Laughing Water Capital invested in Whole Earth Brands, Inc. (NASDAQ:FREE), the stock is not on our list of 30 Most Popular Stocks Among Hedge Funds. Our records show that 18 hedge fund portfolios held Whole Earth Brands, Inc. (NASDAQ:FREE) at the end of the first quarter of 2022, up from 15 in the previous quarter. Whole Earth Brands, Inc. (NASDAQ:FREE) shares lost -23.47%of their value over the last 3 months.
You can check another article on Whole Earth Brands, Inc. (NASDAQ:FREE), released in March, where we shared Richie Capital Group’s views about the company. In addition, please check out our hedge fund investor letters Q2 2022 page for more investor letters from hedge funds and other leading investors.
Disclosure: None. This article is originally published at Insider Monkey.
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