Merion Road Capital Management, an investment advisor, released its second-quarter 2024 investor letter. A copy of the letter can be downloaded here. In the second quarter, Merion Road Small Cap Fund returned 0.6% compared to (3.3%) for the Russell 2000 Index. The long-only portfolio of Merion Road rose +1.5% during the quarter compared to a 4.4% return for the S&P 500 Index. In addition, you can check the fund’s top 5 holdings to determine its best picks for 2024.
Merion Road Capital Management highlighted stocks like Victory Capital Holdings, Inc. (NASDAQ:VCTR), in the first quarter 2024 investor letter. Victory Capital Holdings, Inc. (NASDAQ:VCTR) is an asset management company. The one-month return of Victory Capital Holdings, Inc. (NASDAQ:VCTR) was 8.56%, and its shares gained 52.56% of their value over the last 52 weeks. On July 17, 2024, Victory Capital Holdings, Inc. (NASDAQ:VCTR) stock closed at $52.39 per share with a market capitalization of $3.395 billion.
Merion Road Capital Management stated the following regarding Victory Capital Holdings, Inc. (NASDAQ:VCTR) in its Q2 2024 investor letter:
“After a fairly active Q1, I did a lot less repositioning this quarter. One holding I have adjusted is a previously undiscussed name, Victory Capital Holdings, Inc. (NASDAQ:VCTR). VCTR is a traditional asset management firm with ~$175bn of assets under management (“AUM”) that was taken private through a management buy-out in 2013 and relisted in 2018. The company is incredibly shareholder friendly. With a diligent focus on cost management VCTR operates at EBITDA margins close to 50% and generates prodigious cashflow. This cashflow has historically been used for shareholder returns (45% towards dividends and buybacks since IPO) and M&A. Since the initial management buy-out the company has completed 7 acquisitions which have grown their AUM from $18bn to $170bn, diversified the product offering and client base, and provided incremental operating efficiencies. I initiated a position in Q4 of 2021 when they sold off following a disappointing quarter, and added as valuation became increasingly attractive throughout 2022. As the risk/return dynamics became less favorable this year, I pared back on our holdings.
In April VCTR announced that they would acquire Amundi USA. I viewed this as an incredible acquisition and subsequently repurchased what I had sold earlier this year, and then some. I actually paid higher prices than what I had sold at; there is no use in being anchored to our prior selling price, especially when new information emerges. The transaction grants Amundi parent 26% equity ownership in VCTR in exchange for $104bn in AUM or 38% of the pro forma AUM. This is an attractive ratio and the fact that VCTR operates with some debt makes it even more so. VCTR stock has moved up since announcement, but at current levels it implies that they are paying ~5.2x synergized EBITDA. I tend to trust their synergy targets as it only incorporates expense savings and VCTR has a track-record of exceeding these. The real kicker here is potential revenue synergies as VCTR and Amundi parent are concurrently entering into a 15-year distribution agreement for US/non-US investment products. Since Amundi is one of the largest European asset managers with $2.2tn in AUM, I would expect that this arrangement could lead to some meaningful flows for “tiny” VCTR – and the fact that Amundi is taking stock gives them financial incentives to do so.”
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Victory Capital Holdings, Inc. (NASDAQ:VCTR) is not on our list of 31 Most Popular Stocks Among Hedge Funds. As per our database, 22 hedge fund portfolios held Victory Capital Holdings, Inc. (NASDAQ:VCTR) at the end of the first quarter which was 22 in the previous quarter. During the quarter, Victory Capital Holdings, Inc. (NASDAQ:VCTR) experienced an 8% growth in AUM from the previous quarter, and revenue increased by $10.1 million to $215.9 million. While we acknowledge the potential of Victory Capital Holdings, Inc. (NASDAQ:VCTR) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
In another article, we discussed Victory Capital Holdings, Inc. (NASDAQ:VCTR) and shared TimesSquare Capital U.S. Small Cap Growth Strategy’s views on the company. In addition, please check out our hedge fund investor letters Q2 2024 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.
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