Worm Capital LLC, an investment management firm, published its “Longleaf Partners Small-Cap Fund” second quarter 2021 investor letter – a copy of which can be downloaded here. A portfolio quarterly return of -15.18% net of fees, was recorded by the Worm Capital’s long/short equity growth strategy for the second half of 2021, and -1.49% for its long-only equity strategy, while its benchmark, the S&P 500 Index, by comparison returned 15.25% over the same period. 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 Worm Capital, the fund mentioned Netflix, Inc. (NASDAQ: NFLX), and discussed its stance on the firm. Netflix, Inc. is a Los Gatos, California-based content platform and production company that currently has a $230.3 billion market capitalization. NFLX delivered a -3.73% return since the beginning of the year, while its 12-month returns are up by 5.22%. The stock closed at $520.55 per share on August 06, 2021.
Here is what Worm Capital has to say about Netflix, Inc. in its Q2 2021 investor letter:
“In Q2, we sold our last remaining NFLX lots after first purchasing shares in 2014. Frankly, we believe our entry and exit makes a good case study for how we think about building a position over time, and ultimately exiting.
In the early days of our position, NFLX was a very volatile position, with regular 10%+ swings in either direction. While that sort of volatility can make many uncomfortable, it was attractive to us as investors. Why? It told us the market still didn’t know how to properly value the opportunity. Initially, that’s an element that attracts us to certain companies—complexity in valuation. Not all complex companies will perform nearly as well as NFLX, of course, but stable, simple-to-understand companies don’t provide much asymmetric upside if the market already has it figured out.
In the early days of our NFLX position, we recall that many on Wall Street seemed to hate the stock—they deemed it structurally unprofitable, a loser to the studios, etc.—but they failed to see how, over the long-term, NFLX was attempting to build a powerful free cash flow machine with a magnificent global opportunity. Reed Hastings and his team deserve all the credit in the world for sticking true to their long-term mission. So, why did we finally sell?
In essence, we believe the company began to trade at parity with its intrinsic value—i.e. where price meets value—which is ultimately where our edge begins to decay.
If a stock is priced rationally, then upside is limited. And, given other opportunities we see in the market, we believe our fund’s capital is better deployed into higher conviction, higher-upside companies. These companies may be more volatile (i.e. TSLA, SPOT), but we also believe that’s an indication the market is still figuring out how to value them. We learned a great deal from our years studying the NFLX model, and we’ll continue to follow the evolution of the company. In our experience, however, it’s worth pointing out that the most contrarian or divisive companies where opinion diverges—these are the companies to pay most attention to.”
mollie-sivaram-yubCnXAA3H8-unsplash
Based on our calculations, Netflix, Inc. (NASDAQ: NFLX) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. NFLX was in 110 hedge fund portfolios at the end of the first quarter of 2021, compared to 116 funds in the fourth quarter of 2020. Netflix, Inc. (NASDAQ: NFLX) delivered a 3.32% 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.
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.
Disclosure: None. This article is originally published at Insider Monkey.
