1 Main Capital, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A net return of 18.3% was delivered by the fund for the Q1 of 2021, ahead of its S&P 500 and Russell 2000 benchmark that delivered a 6.2% and 12.7% return respectively in the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
1 Main Capital, in their Q1 2021 investor letter, mentioned Alphabet Inc. (NASDAQ: GOOG) and shared their insights on the company. Alphabet Inc. is a Mountain View, California-based conglomerate company that currently has a $1.5 trillion market capitalization. Since the beginning of the year, GOOG delivered a 32.16% return, extending its 12-month gains to 81.47%. As of April 23, 2021, the stock closed at $2,315.30 per share.
Here is what 1 Main Capital has to say about Alphabet Inc. in their Q1 2021 investor letter:
“Alphabet Inc (GOOG), one of the largest and most talked about companies on earth, currently presents an incredibly attractive opportunity, especially relative to its risk. While some may be skeptical that an emerging fund such as ours could have any edge at all in owning GOOG, that is precisely our edge.
In other words, our ability to own GOOG without having to manufacture a variant view is one of the many competitive advantages we have compared to some larger, more institutionalized peers who may find it difficult to tell LPs that a vanilla company like GOOG is one of their favorite investments.
We are proudly running a relatively unconstrained strategy, and appreciative of our LP base that gives us the flexibility to look for the best risk / reward wherever it may lie. We also feel comfortable admitting that sometimes the most obvious bargains do hide in plain sight. In fact, despite nearly doubling since we first wrote it up in our Q2’18 letter, GOOG is just as exciting at current levels as it was back then.
Since pretty much everyone knows what GOOG does in its core business, there is no need to re-hash it here. However, I find it wild that we can own the most dominant advertising business on earth for less than 23x next year’s earnings (21x ex-cash). Typically, dominant, mature, global businesses that grow revenues in-line with GDP trade at higher multiples than this. Thus, given the relatively reasonable current multiple, I do not see much risk of long-term multiple compression here.
Yet, GOOG’s core advertising business, which drives all its profitability, actually grows much faster than global GDP. This is a business that has powerful secular tailwinds at its back, as advertising budgets continue to shift towards digital formats away from traditional ones. I expect this trend will continue for a long time and that current shareholders stand to benefit from the attractive growth.
Even better, GOOG’s earnings are not only growing faster than the average company, but they are also being weighed down significantly by its cloud business and various other bets. It is highly likely that these current drags on profitability will at some point generate significant earnings and be worth hundreds of billions of dollars.
Additionally, the company’s balance sheet is pristine. GOOG is sitting on over $100 billion of net cash. Many investors may argue that this is not a new dynamic. After all, the company has been building cash for a long time. However, the combination of GOOG’s new CEO (who effectively took the reins to start 2020) and well-regarded CFO (since 2015) are slowly instilling more focus and financial discipline on the company. Costs are being watched carefully, especially within other bets, and the pace of capital return has increased significantly of late. In fact, the pace of buybacks has more than tripled to greater than $30
billion in 2020, up from less than $10 billion in 2018. I expect this upward trend of buybacks to continue.Looking out to 2025, it is not difficult to imagine a core Google Services segment that generates close to $100 billion of annual net income, after corporate costs. If we add to that cloud, other bets and interim cash generation we could be looking at a company worth $3 trillion by the end of 2024, which would make GOOG more than a double from current levels. Not bad for a boring, well known mega-cap.”
Pixabay/Public Domain
Our calculations show that Alphabet Inc. (NASDAQ: GOOG) ranks 6th in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Alphabet Inc. was in 157 hedge fund portfolios, compared to 150 funds in the third quarter. GOOG delivered a 21.90% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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Disclosure: None. This article is originally published at Insider Monkey.
