Worm Capital LLC, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A portfolio quarterly return of -0.41% was recorded by the fund for the third quarter of 2021, while its benchmark, the S&P 500 TR Index, by comparison, returned -4.65% 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 Q3 2021 investor letter of Worm Capital, the management firm mentioned General Motors Company (NYSE: GM) and discussed its stance on the firm. General Motors Company is a Detroit, Michigan-based automotive company with an $81.9 billion market capitalization. GM delivered a 35.54% return since the beginning of the year, while its 12-month returns are up by 75.23%. The stock closed at $56.44 per share on October 7, 2021.
Here is what Worm Capital has to say about General Motors Company in its Q3 2021 investor letter:
“Now, when it comes to valuation of these business models, during periods of relative industrial stability, it makes sense to value them as a multiple of an historic metric—earnings, cash flow, etc.
But we’re not living in a period of relative industrial stability. We’re living through industrial chaos, and so an investor’s valuation strategy must adapt as well. We need to look forward to find value—not backwards. In other words, it’s silly to value a business as a multiple of historic cashflows if there exist high odds that those cashflows will diminish significantly over time—and potentially very quickly. Certain businesses—because of their inability to adapt and innovate—should arguably be valued at near-zero today, at least until they can at least prove they have an ability to compete and generate meaningful cashflows in the future.
General Motors is, in our opinion, one of those businesses—it’s a prime example of a mature business model that could face obsolescence. We’ve been writing about this dynamic since 2017 (see: Why General Motors Has Already Lost to Tesla) but this quarter— with a $2 billion recall of every single Chevrolet Bolt ever produced—was an early indication of what may lie ahead the future for General Motors.
Our view is that GM—and many of its incumbent peers—are simply not structured to aggregate marginal gains to its new line of EVs. Here’s a quick example of how this plays out: Our rough estimation is that GM continues to lose about $8,000 for every Bolt it sells. The company has sold about 142,000 Bolt vehicles since production began in late 2016. (By comparison, Tesla delivered more than 240,000 vehicles this quarter alone—at around 30% gross margins.)
With the recent $2 billion recall for 142,000 Bolts, that represents a cost of about $14,000 to fix each vehicle. If GM was already losing $8,000 per Bolt, that puts the retroactively implied Bolt gross margin at a loss of more than ($-22,000) per vehicle, or an implied (-63%) gross margin profile per car produced.”
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Based on our calculations, General Motors Company (NYSE: GM) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. GM was in 86 hedge fund portfolios at the end of the first half of 2021. General Motors Company (NYSE: GM) delivered a 0.68% 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.
