Laughing Water Capital LP, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly median account return of 9.5% net of fees was recorded by the fund for the second quarter of 2021, compared unfavorably to the 8.6% and 4.3% returns of the SP500TR and R2000TR respectively. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Laughing Water Capital, the fund 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, that currently has a $1.4 billion market capitalization. HMHC delivered a 232.73% return since the beginning of the year, extending its 12-month returns to 313.43%. The stock closed at $11.24 per share on July 27, 2021.
Here is what Laughing Water Capital has to say about Houghton Mifflin Harcourt Company in its Q2 2021 investor letter:
“HMHC is the leading provider of instructional materials to students in grades K-12 in the U.S. At the end of this letter you will find a longer writeup, but in brief I believe the combination of a newly cleaned up balance sheet, slimmed down operating structure, a Covid induced acceleration of digital learning, and billions of dollars in federal stimulus set to flood the education world has put HMHC in position to gush cash over the next few years… but the market has failed to appreciate these changes. Given the pending onslaught of federal stimulus dollars I think it will be very difficult to lose money in this investment, and if the company reinvests this cash wisely and the market recognizes how this business has evolved, there is a path to multi-bagger returns looking out a few years.”
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Based on our calculations, Houghton Mifflin Harcourt Company (NASDAQ: HMHC) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. HMHC was in 25 hedge fund portfolios at the end of the first quarter of 2021, compared to the same 25 funds in the fourth quarter of 2020. Houghton Mifflin Harcourt Company (NASDAQ: HMHC) delivered a 25.23% 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.
