White Brook Capital, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A portfolio return of 8.86% was recorded by the fund for the second quarter of 2021, outperforming its S&P 400 benchmark that delivered a 3.64% return for 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 White Brook Capital, the fund mentioned Post Holdings Partnering Corporation (NYSE: PSPC), and discussed its stance on the firm. Post Holdings Partnering Corporation is a Missouri, United States-based blank-check company, that currently has a $424.7 million market capitalization. The stock closed at $9.85 per share on July 16, 2021.
Here is what White Brook Capital has to say about Post Holdings Partnering Corporation in its Q2 2021 investor letter:
“Post Holdings Partnering Company was mispriced when White Brook invested during the quarter. In both upside and downside cases, White Brook believed the warranted price was higher than was priced in the market.
Post Holdings Partnering Company is one of the first in a new generation of SPACs where the incentives aren’t as misaligned to investors’ interests as the version that has made sponsors and vendors hundreds of millions of dollars at the expense of investors over the past two years. I discussed these issues broadly in a recent Laps and Gaps episode, also available now on YouTube. The most significant points are:
1) The sponsor is a major, publicly traded company, Post Holdings, and it has to live with the transaction – which means there’s significant board oversight by the acquiring firm;
2) The management team is not compensated for completing a deal. Now that the vehicle exists, their pay is the same whether a deal is completed or not. This means that they have to live with the acquired firm as managers of the sponsor, and can take a reputational hit if it’s a bad deal. In other words they have risk immediately, but not reward – unless the deal is a good one.
3) CEO, Robert Vitale, is known for shrewd capital allocation. If a bad deal is completed, his reputation will be impaired, even while his pay is not increased. If a good deal is completed, it’s in line with the reputation he’s earned.
4) The SEC cares now.
That we were able to buy at the SPAC’s cash value with the ⅓ warrant attached to each share that gives the holder the ability to buy stock at $11.50 until the price of the stock reaches $18, increased the likelihood that even a downside case would result in a profitable trade for us. At worst, we’ll put the stock back to the company at basically the price we purchased shares, but I believe we have an above average chance of earning a decent return and a good chance of also realizing a home run – we’ll see what happens.”
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.