Laughing Water Capital, an investment management firm, published its fourth-quarter 2021 investor letter – a copy of which can be downloaded here. For the fourth quarter of 2021, an investment in Class A shares of Laughing Water Capital (“LWC”) returned less than 1% vs 11.0% and 2.1% for the SP500TR and R2000 respectively. For the full year, LWC returned approximately 39%, vs. 28.7% and 14.8% for the SP500TR and R2000 respectively. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.
Laughing Water Capital, in its Q4 2021 investor letter, mentioned Houghton Mifflin Harcourt Company (NASDAQ: HMHC) and discussed its stance on the firm. Houghton Mifflin Harcourt Company is a Boston, Massachusetts-based publishing company with a $2.3 billion market capitalization. HMHC delivered a -28.67% return since the beginning of the year, while its 12-month returns are up by 37.94%. The stock closed at $18.12 per share on February 19, 2022.
Here is what Laughing Water Capital has to say about Houghton Mifflin Harcourt Company in its Q4 2021 investor letter:
“Houghton Mifflin (HMHC) – Houghton Mifflin, the largest provider of K-12 instructional materials in the U.S., was introduced in our 1H’21 letter, and there is a slide deck outlining the thesis available on www.laughingwatercapital.com. The market has begun to realize that thanks to drastic changes to its cost structure and an on-going shift toward a digital first approach to education HMHC is no longer the perennial money loser that it once was. In fact, HMHC is now primed to gush cash in the coming years as the country attempts to fill in the learning loss created by Covid. The company has very attractive avenues in which to re-deploy this cash, suggesting that normalized earnings per share could double over the next 4-5 years. Additionally, the company is becoming more predictable as the business mix shifts toward digital and SAAS solutions, which suggests a higher than historical multiple would be appropriate. This combination of increasing cash flow and likely multiple expansion has the potential to reward us for years to come.
However, due its under-levered balance sheet, ability to generate cash, and low valuation, I have long feared that a private equity buyer would buy the company and enjoy the majority of the spoils. In midJanuary Bloomberg reported that the company is exploring a sale. From my perspective, given multiple imminent catalysts that could contribute to shares re-rating higher, it only makes sense to explore a sale now if the company already has a bid in hand from a prospective buyer. Private equity has long loved the education space, and given the strategic value of the company’s industry leading salesforce and connected platform, I believe HMHC represents the potential for enormous synergies on both costs and revenue to any potential buyer. The potential for a sale should help insulate HMHC from broader market swings, and we may wind up with a “short term win” with a publicly disclosed buyout offer. However, given the size of the opportunity in front of HMHC, absent a very substantial premium we are happy holders.”
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Our calculations show that Houghton Mifflin Harcourt Company (NASDAQ: HMHC) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. HMHC was in 32 hedge fund portfolios at the end of the third quarter of 2021, compared to 27 funds in the previous quarter. Houghton Mifflin Harcourt Company (NASDAQ: HMHC) delivered a -18.25% return in the past 3 months.
In July 2021, we also shared another hedge fund’s views on HMHC in another article. You can find other letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q4 page.
Disclosure: None. This article is originally published at Insider Monkey.
