Giverny Capital, an asset management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly net return of 7.29% was delivered by the fund for the Q2 of 2021, slightly below its benchmark, the S&P 500 Index, which delivered an 8.5% gain 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 Giverny Capital, the fund mentioned Autohome Inc. (NYSE: ATHM) and discussed its stance on the firm. Autohome Inc. is a China-based online destination for automobile consumers provider with a $5.5 billion market capitalization. ATHM delivered a -55.13% return since the beginning of the year, while its 12-month returns are down by -51.46%. The stock closed at $44.65 per share on September 14, 2021.
Here is what Giverny Capital has to say about Autohome Inc. in its Q2 2021 investor letter:
“We used some of the proceeds to buy more Autohome, a Chinese Internet business that has become the leading source of news and consumer-generated reviews of automobiles. China is already the largest market for new autos, by units, yet fewer than one in five Chinese adults owns a car. This compares to more than 80% of Americans, roughly 60% of adults in Japan or Western Europe and 30% to 40% in Taiwan and Korea.
Despite low ownership, interest in cars is high: Autohome hosts nearly 40 million visitors on its web site every day. Car dealers pay it for leads on new customers; auto manufacturers buy advertising on the site to reach potential car buyers; and lenders, insurers and others buy marketplace data on transactions.
We first bought Autohome last fall in the low-$90s. By early 2021, the stock rose to $140. Then Autohome announced that it was filing for a listing on the Hong Kong stock exchange in part because it feared being delisted in the United States, where we own its American Depository Receipts (ADRs). The stock plunged back into the $90s. We added a bit more to our position then. Autohome next issued conservative guidance for the year ahead, based on slowing demand for new cars in China.
Autohome’s US ADRs sold for $63 at the end of June. The market cap for the company is down to $8 billion. It has $2.7 billion in net cash on hand, meaning the cash-adjusted value of the business is $5.3 billion. Against this, Autohome should generate $500 million of operating profit this year and more than $400 million of free cash flow. This strikes us as a nice cash flow yield for a company that has doubled profit over the past five years and dominates an immature market that could become much larger. As an extra plus, many Chinese are buying their first automobile, meaning the used car market barely exists. Autohome has an opportunity to grow in this niche as well.
The market clearly is concerned that the auto market in China is slowing permanently, even as new competitors challenge Autohome’s dominance. Ultimately, even if Autohome stopped growing, the company generates cash flow to the point that net cash on hand could be half the current market cap within three years. The company could undertake a huge stock buyback or dividend program, or it could ramp up investment to improve its competitive position. It is not lost on me that the two worst stocks in our portfolio this year are the two domiciled the farthest from our New York office. But Autohome remains a fine business trading cheaply.”
Based on our calculations, Autohome Inc. (NYSE: ATHM) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. ATHM was in 16 hedge fund portfolios at the end of the first half of 2021, compared to 18 funds in the previous quarter. Autohome Inc. (NYSE: ATHM) delivered a -32.06% 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.
