Here’s Why Headwaters Capital Feels Great About its SPS Commerce (SPSC) Position

Headwaters Capital, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of 2.8% was recorded by the fund for the third quarter of 2021, outperforming the Russell Mid Cap Index that delivered a -0.9% return for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Headwaters Capital, in its Q3 2021 investor letter, mentioned SPS Commerce, Inc. (NASDAQ: SPSC) and discussed its stance on the firm. SPS Commerce, Inc. is a Minneapolis, Minnesota-based software company with a $5.7 billion market capitalization. SPSC delivered a 46.85% return since the beginning of the year, while its 12-month returns are up by 85.68%. The stock closed at $159.46 per share on October 8, 2021.

Here is what Headwaters Capital has to say about SPS Commerce, Inc. in its Q3 2021 investor letter:

“Top Contributor: SPS Commerce (SPSC) +62% SPS Commerce is a provider of supply chain software called electronic data interchange (EDI) that is used by suppliers of large retailers (Costco, Walmart, Bass Pro Shops, etc). SPSC’s software helps to automate and streamline the order fulfillment process for retailers and their suppliers by enabling the exchange of real time information between the two parties, which allows for better inventory management and more efficient shipping (drop-ship v. direct to store). SPSC is a beneficiary of the trend toward omnichannel retail where customers expect multiple order fulfillment options (in-store, delivery, buy online pick up in store) and more complex supply chains as both trends require increased collaboration between the retailer and their suppliers. In conjunction with Q2 results, SPSC raised its long-term revenue guidance forecast, which was well received by the market given lingering concerns that customers had temporarily adopted SPSC’s software during COVID to enable drop-shipping. In reality, SPSC’s software is a sticky product that streamlines the fulfillment process and will be increasingly used throughout the omnichannel retail supply chain.”


Photo by Danial Igdery on Unsplash

Based on our calculations, SPS Commerce, Inc. (NASDAQ: SPSC) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. SPSC was in 20 hedge fund portfolios at the end of the first half of 2021. SPS Commerce, Inc. (NASDAQ: SPSC) delivered a 58.24% 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.