Merion Road Capital Management, an investment management firm, published its first-quarter 2022 investor letter – a copy of which can be downloaded here. Merion Road Capital’s long-only strategy was down 14.3% in the first quarter of 2022. This is roughly comparable to its loss in Q1 2020 during the covid sell‐off. The obvious difference between the two periods is their relative (under)performance versus the broader market. Try to spend some time taking a look at the fund’s top 5 holdings to be informed about their best picks for 2022.
In its Q1 2022 investor letter, Merion Road Capital mentioned Ferguson plc (NYSE:FERG) and explained its insights for the company. Founded in 1887, Ferguson plc (NYSE:FERG) is a Wokingham, United Kingdom-based multinational plumbing and heating products distributor with a $28.8 billion market capitalization. Ferguson plc (NYSE:FERG) delivered a 16.79% return since the beginning of the year, while its 12-month returns are up by -9.58%. The stock closed at $131.48 per share on April 13, 2022.
Here is what Merion Road Capital has to say about Ferguson plc (NYSE:FERG) in its Q1 2022 investor letter:
“By far our largest detractor so far has been Ferguson (“FERG”), accounting for a 4% hit to the portfolio. From a market perspective the stock has sold off along with the rest of the construction industry largely due to the fear of higher rates / economic uncertainty impacting housing demand. I am not entirely sold on the thesisthat new housing starts are going to fall off a cliff as we remain woefully underbuilt (February starts were down 1.9% vs. January but up 7.7% vs. February last year). In any case, 60% of FERG revenue comes from renovation, maintenance, and improvement, an inherently more stable business. Furthermore, 56% of their revenue is non‐residential which is less impacted by rates. In the near‐term FERG actually benefits from rising commodity costs as it provides a boost to margins.
Last quarter I discussed FERG moving their primary listing to the U.S. as a positive for the stock. While this remains true, I did not appreciate the short‐term trading dynamics. European index funds are currently selling their holdings as the stock no long falls within their mandate. Conversely U.S. index funds will buy the stock after the move is completed and enough time has passed. Analysts estimate that European index funds account for 10% of shares outstanding while U.S. index funds will own 20% of the shares – a 10% net increase in demand. The issue is timing. European indices are selling ahead of the move where as U.S. indices will not add for another year or so. I would not be surprised if this “artificial” selling pressure has been impacting the market value as well.”
Our calculations show that Ferguson plc (NYSE:FERG) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Ferguson plc (NYSE:FERG) was in 12 hedge fund portfolios at the end of the first quarter of 2022, compared to 10 funds in the previous quarter. Ferguson plc (NYSE:FERG) delivered a 19.17% return in the past 3 months.
In October 2021, we published an article that includes Ferguson plc (NYSE:FERG) in the 11 Best High Dividend Stocks Under $50. You can find more than 100 investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.
Disclosure: None. This article is originally published at Insider Monkey.
