Palm Capital, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. Over the three months ending 30 June 2021, our portfolio increased by 12.3% after management fees & trading expenses. Since the fund started, its portfolio has returned 15.2% per annum after management fees & expenses. The fund has outperformed the MSCI World Index by 3.9% per annum while holding better businesses and buying them below their worth. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Palm Capital, the fund mentioned Equifax Inc. (NYSE: EFX) and discussed its stance on the firm. Equifax Inc. is an Atlanta, Georgia-based consumer reporting agency company with a $31.8 billion market capitalization. EFX delivered a 35.53% return since the beginning of the year, while its 12-month returns are up by 65.30%. The stock closed at $265.50 per share on September 24, 2021.
Here is what Palm Capital has to say about Equifax Inc. in its Q2 2021 investor letter:
“We don’t invest in banks. It’s difficult for one established bank to differentiate itself from another. This results in low profit margins. These are not necessarily bad for a defensive business. But for a business such as a bank that has lots of debt, has high fixed costs and is dependent on economic and credit cycles, a small change in interest rates or bad debt has a magnified impact on future profits. The timing and length of these cycles and the bank’s navigation through them are all difficult to predict. There’s therefore high uncertainty around its revenue and profits.
Instead, we do invest in credit data bureaus. Equifax, for example, is a share that we owned for a long time. The data these bureaus have is unique. It takes decades to build up. Their customers can’t make their most important decision – lending – without this data. And the cost of this data is low relative to the value of the loans being made. These factors all result in attractive profit margins and give the bureaus an ability to raise prices above inflation. Furthermore, customers typically get data from more than one bureau to cross check it, so bureaus aren’t incentivized to undercut each other on prices.
Because these businesses are capital light, they need little debt to operate. So, while their revenue is dependent on the economic and credit cycle, low levels of debt, high profit margins and the uniqueness of their business models mean that profits are less easily disrupted and less sensitive than those of banks. Equifax stands apart because it is building up data in other areas such as employment records that reduces its dependence on the credit cycle even further.”
Source: pexels
Based on our calculations, Equifax Inc. (NYSE: EFX) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. EFX was in 37 hedge fund portfolios at the end of the first half of 2021. Equifax Inc. (NYSE: EFX) delivered a 10.05% 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.
