If you are looking for the best ideas for your portfolio you may want to consider some of Laughing Water Capital’s top stock picks. Laughing Water Capital, an investment management firm, is bullish on Flotek Industries Inc (NYSE:FTK) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Flotek Industries Inc (NYSE:FTK) stock. Flotek Industries Inc (NYSE:FTK) manufactures and markets downhole equipment and specialty chemicals.
In July 2019, Laughing Water Capital had released its Q2 2019 investor letter. The investment firm said that Flotek Industries Inc (NYSE:FTK) was one of the top five positions in Q2 2019. Flotek Industries Inc (NYSE:FTK) stock has posted a return of -0.8% in the trailing one year period, underperforming fund’s benchmark the S&P 500 Index which returned 13.3% in the same period. This suggests that the investment firm was wrong in its decision. On a year-to-date basis, Flotek Industries Inc (NYSE:FTK) stock has risen by 23.5%.
Laughing Water Capital fund posted a return of 10.3% in the second quarter of 2019, outperforming fund’s benchmark the S&P 500 Index which returned 4.30% in the same period. Let’s take a look at comments made by Laughing Water Capital about Flotek Industries Inc (NYSE:FTK) stock in the Q2 2019 investor letter.
“Flotek (FTK) – Flotek was introduced last quarter as an undisclosed position. At the time of our purchase, the company was trading below our estimate of net current asset value (current assets minus all liabilities) with two thirds of its market cap in cash or near cash, which essentially means we bought the balance sheet, and got the business for free. This anomaly came about due to the recent sale of one of the company’s two segments for an amount that was greater than the enterprise value of the entire company at the time of the sale.
If you believe in efficient markets, please take a moment to re-read the previous sentence. To recap, this company owned two businesses, and was able to sell one of them to a knowledgeable buyer at a price that was ~150% greater than the price that the stock market put on both businesses. Clearly Mr. Market was asleep at the wheel, and while nothing is ever guaranteed, this is a good reminder that digging through the forgotten corners of the markets can lead to fantastic opportunities for the patient.
We did not buy our shares until after the announcement of the sale when shares had already moved higher, but this position was still sized large from the outset, as I expected the stock to trade up substantially more as quants digested updated financials which revealed the pro forma balance sheet for the first time. This prediction came to pass and shares traded up by ~25% before retreating into the end of the quarter leaving us with a slight gain. In my view FTK is properly viewed as near cash with a free option on a business that while tied to frac drilling has characteristics that make it better than the industry as a whole. Importantly, there is an incentivized capital allocator at the helm, ensuring that this cash is not squandered, and this individual has recently personally purchased additional shares. My original assumption was that a large portion of the cash would be returned to shareholders following Q1 earnings, but that did not happen as the board had not finished a strategic review. There is reason to believe that cash will be returned in conjunction with Q2 earnings, and if it is, I will re-underwrite at that time.”
In Q1 2020, the number of bullish hedge fund positions on Flotek Industries Inc (NYSE:FTK) stock decreased by about 11% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with Flotek’s growth potential. Our calculations showed that Flotek Industries Inc (NYSE:FTK) isn’t ranked among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.