Wedgewood Partners, an investment management firm, published its “Focused SMID Cap Strategy” first-quarter 2022 investor letter – a copy of which can be downloaded here. For the first quarter of 2022, the Focused SMID Cap Composite (NET) declined -by 13.2%. The Russell 2500 Index declined -by 5.8%. On an annualized trailing 1-year, 3-year, and inception (6/30/2018) the Focused SMID Cap returned +1.7%, +19.7%, and +15.5%, (NET) respectively. Over the same time periods, the Russell 2500 Index returned +0.3%, +13.5%, and +10.5%, respectively. Try to spend some time looking at the fund’s top 5 holdings to be informed about their best picks for 2022.
In its Q1 2022 investor letter, Wedgewood Partners Focused SMID Cap mentioned Maximus, Inc. (NYSE:MMS) and explained its insights for the company. Founded in 1975, Maximus, Inc. (NYSE:MMS) is a Reston, Virginia-based IT service management company with a $3.9 billion market capitalization. Maximus, Inc. (NYSE:MMS) delivered a -20.25% return since the beginning of the year, while its 12-month returns are down by -30.46%. The stock closed at $63.54 per share on May 25, 2022.
Here is what Wedgewood Partners Focused SMID Cap has to say about Maximus, Inc. (NYSE:MMS) in its Q1 2022 investor letter:
“Maximus currently is our largest holding in the Focused SMID Cap strategy. Maximus operates health and human service programs on behalf of governments, primarily for state governments and the federal government in the U.S., but in select other countries too. Maximus functions as a government contractor, administering complete programs or portions of programs for its government customers.
Examples of this work might include running customer service call centers for Medicare, determining a citizen’s eligibility for Medicaid and enrolling that citizen in their state’s program, assisting a federal agency in modernizing its IT systems, or operating job-seeking programs for unemployed citizens, among many other things.
We originally held a modest position in the portfolio, because we saw Maximus as a solid company with steady growth prospects. Government customers continued to look for ways to improve their own operations and to reduce costs by outsourcing programs and components of programs to partners such as Maximus. Maximus’s primary competitor – and this is the same for any of its peers – is the internal operations of their government customers. The Company’s abilities to spread its resources across multiple customers and to share best practices across customers makes it an easy choice for government partners.
Our thinking about Maximus evolved rapidly in the early days of the pandemic, and this eventually led us to make the stock our largest holding. From a shorter-term perspective, the company used its capabilities and its entrenched position with government health service agencies to secure a meaningful amount of COVID-related work during 2020-2021, including things like handling contact tracing or vaccine information hotlines. However, the longer-term implications of COVID for the Company’s government customers-and, therefore for Maximus-really caught our attention.
As COVID first hit early in 2020, the healthcare system became overwhelmed, and lockdowns led to economic disruption, business closures, and sudden unemployment. It quickly became apparent to us that a significantly greater level of government support was going to be required, both during and after the initial emergency. As Maximus is primarily focused upon healthcare and human services, all of this was a potential growth opportunity for the Company. Rethinking public healthcare preparedness and crisis response was one obvious component of this, along with the administration of various longer-term stimulus-driven assistance programs.
As the industry had to suddenly evolve, Maximus was able to demonstrate its capabilities during a major crisis, and we believe this allowed it to integrate itself further with existing customers and exposed it to new customers, as well, allowing the Company to take advantage of new opportunities as they arise in the post-COVID world. We see clear evidence of this in the Company’s high-teens organic revenue growth guidance for this fiscal year, which is well ahead of the roughly mid-single-digit growth rates we expected from the company in the pre-COVID era. In fact, the Company has since won significant levels of new business from government customers to whom it was first exposed during COVID.
We believe the market is not appreciating the positive longer-term changes to Maximus’s business model. That has created significant opportunity in the stock. In addition, we believe there have been a variety of crosswinds that perhaps have further distracted investors. We also believe that a group of investors jumped in at some point, for example, toward the end of 2020, when it became apparent that Maximus was just a short-term beneficiary from COVID-related work. These same investors likely exited the stock as shorter-term work, i.e. the entire reason they had bought the stock, began to wind down a few quarters later.”
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Our calculations show that Maximus, Inc. (NYSE:MMS) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Maximus, Inc. (NYSE:MMS) was in 18 hedge fund portfolios at the end of the first quarter of 2022, compared to 24 funds in the previous quarter. Maximus, Inc. (NYSE:MMS) delivered a -14.73% return in the past 3 months.
In November 2021, we also shared another hedge fund’s views on Maximus, Inc. (NYSE:MMS) in 15 Stock Picks of Michael O Keefe’s 12th Street Asset Management. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.
Disclosure: None. This article is originally published at Insider Monkey.
