SRK Capital, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A return of +59.17% was delivered by the fund for the second half of 2021, outperforming the S&P 500 and the Russell 2000 Index that gained +15.25% and 17.53%, respectively for the same period. 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 SRK Capital, the fund mentioned Harrow Health, Inc. (NASDAQ: HROW), and discussed its stance on the firm. Harrow Health, Inc. is a Nashville, Tennessee-based pharmaceutical company, that currently has an $234.7 million market capitalization. HROW delivered a 28.72% return since the beginning of the year, extending its 12-month returns to 39.72%. The stock closed at $9.02 per share on August 10, 2021.
Here is what SRK Capital has to say about Harrow Health, Inc. in its Q2 2021 investor letter:
“Harrow Health is a new position added to the portfolio during the first half of the year. I believe the company is overlooked by the market due to its small market cap, accounting masking the attractiveness of its core business, and failure to price in the current transformation that is taking place. I believe the business has reached a fundamental inflection point as operating leverage begins to take effect and management is able to strengthen and de-risk the platform with favorable partnerships and acquisitions. The core business is ImprimisRx, a market leading FDA-registered ophthalmic pharmaceutical drug compounder serving over 10,000 prescribers, institutions, and their patients. Since 2014, they have grown this business from zero revenues to over $51 Million. Their research has shown that over 90 percent of ophthalmic prescribers regularly used compounded drugs in their practices due to the fact that FDA-approved products were not adequately meeting the needs of a vast number of ophthalmologists, optometrists, and their patients. A sizeable portion of Harrows revenues come from cataract surgery patients; currently about 4 million cataract surgeries are performed each year in the U.S., and this is conservatively expected grow at 4% per year over the next decade as the population ages. Covid has resulted in pent-up demand for cataract surgeries that were put on hold last year due to limitations on elective surgeries. This should result in additional increased revenues over the next two years as approximately 1.6 million additional cataract surgeries need to be completed. The quality of the ImprimisRx business has been partly obscured due to investments in three separate pharmaceutical companies held on their balance sheet and how their change in valuation is accounted for on the income statement (Harrow values these investments around $40 million, but I have left them out of my valuation). Comparing ImprimisRx’s 4Q20 to 4Q19, gives us an idea of the growth and operating leverage inherent in the business; ImprimisRx did $5.0 Million Ebitda in 4Q20 compared to $2.2 Million Ebitda in 4Q19. During the first half of the year Harrow was able to raise $75 Million+ of new capital without diluting shareholders. They plan to use this new capital to leverage the scale and sales relationships they have created to add accretive FDA-approved products to their platform and in effect meaningfully de-risk and improve the quality of their business. As this business continues to scale and operating leverage inflects higher, I expect operating margins to increase to over 30% in the years to come with remarkably high returns on the capital invested in the ImprimisRx business. I believe Harrow Health is potentially worth multiples of its current valuation.”
Based on our calculations, Harrow Health, Inc. (NASDAQ: HROW) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. HROW was in 14 hedge fund portfolios at the end of the first quarter of 2021, compared to 15 funds in the fourth quarter of 2020. Harrow Health, Inc. (NASDAQ: HROW) delivered a -1.65% 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.
