Headwaters Capital’s Top Detractor: Inspire Medical Systems Inc. (INSP)

Headwaters Capital, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of 8.3% was recorded by the fund for the second quarter of 2021, outperforming the Russell Mid Cap Index that delivered a 7.5% 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 Headwaters Capital, the fund mentioned Inspire Medical Systems, Inc. (NYSE: INSP), and discussed its stance on the firm. Inspire Medical Systems, Inc. is a Minnesota, United States-based medical innovation company, that currently has a $5.04 billion market capitalization. INSP delivered a -1.54% return since the beginning of the year, while its 12-month revenues are up by 105.85%. The stock closed at $185.20 per share on July 12, 2021.

Here is what Headwaters Capital has to say about Inspire Medical Systems, Inc. in its Q2 2021 investor letter:

Top Detractor: Inspire Medical Systems (INSP) -7%. Inspire’s underperformance during the quarter was largely driven by Q1 results where the company raised full year revenue guidance by less than expected combined with commentary that the company might increase spending, which would delay the company’s path to breakeven profitability. I believe management’s full year revenue guidance is conservative based on the cadence of new center openings combined with positive utilization trends seen during Q1. Additionally, following the release of Q1 results, Anthem (second largest health insurer) announced that they would begin providing insurance coverage for INSP’s sleep apnea product, which should provide additional support for revenue growth later in the year.”

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Based on our calculations, Inspire Medical Systems, Inc. (NYSE: INSP) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. Inspire Medical Systems, Inc. was in 28 hedge fund portfolios at the end of the first quarter of 2021, compared to 27 funds in the fourth quarter of 2020. INSP delivered a -16.28% return in the past month.

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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