Here’s Why Merion Road Capital Invested in Westwood Holdings Group (WHG)

Merion Road Capital, an investment management company, released its second quarter 2022 investor letter. A copy of the same can be downloaded here. In the second quarter, Merion Road Small Cap Fund returned -6.0% compared to a return of -17.3% for the Russell 2000 Index. The MRCM Long Only Large Cap returned -20.5% compared to a -16.1% return for the S&P 500 Index. The quarter was challenging for the fund and the market as a whole. In addition, you can check the top 5 holdings of the fund to know its best picks in 2022.

Merion Road Capital discussed stocks like Westwood Holdings Group, Inc. (NYSE:WHG) in the second quarter investor letter. Based in Dallas, Texas, Westwood Holdings Group, Inc. (NYSE:WHG) is an investment and wealth management firm. On September 20, 2022, Westwood Holdings Group, Inc. (NYSE:WHG) stock closed at $11 per share. One-month return of Westwood Holdings Group, Inc. (NYSE:WHG) was -21.71%, and its shares lost 42.71% of their value over the last 52 weeks. Westwood Holdings Group, Inc. (NYSE:WHG)  has a market capitalization of $93.061 million.

Here is what Merion Road Capital specifically said about Westwood Holdings Group, Inc. (NYSE:WHG)  in its Q2 2022 investor letter:

“After exiting MN, I started purchasing another sub-scale asset/wealth manager trading at an attractive valuation, about Westwood Holdings Group, Inc. (NYSE:WHG). Fund flows are the primary determinate of the health of the business and an initial review of WHG did not paint a pretty picture (they experienced flows of -26%, – 26%, and -18% for the 2018-2020 periods). Lost in consolidation, however, is the company’s large and underperforming international business that skewed the numbers. WHG closed this division at the end of 2020 and reported positive flows of 6% the following year. Equally as important is profit margin. With assets shrinking from $25bn to $14bn, EBITDA margins had contracted from 32% to 11%. In April I bought a starter position in WHG as it was attractively priced in its current iteration with upside potential should margins revert to industry norms.

In May WHG announced the acquisition of Salient Partners, a $4.5bn manager with significant exposure to energy infrastructure and alternative investment products. I have since increased our position as the deal seems like a good one. Valuation isreasonable and this acquisition will go a long-way in getting WHG back to scale. Importantly, this is an asset acquisition and WHG will not assume their real estate portfolio (lease liabilities); similarly, WHG should be able to realize cost synergies in the C-suite and back office. Down the road there is a potential for WHG and Salient to leverage each other’s distribution capabilities as WHG has historically focused on the RIA market whereas Salient has invested in wholesale relationships. In a presentation deck WHG stated that they expect “significantly greater than 100% Year 1 EPS accretion.” WHG is currently trading around $12.50, has over $3.50 in cash on their balance sheet when adjusted for the acquisition, and should generate between $1.20-$1.50/sh in FCF depending on how the equity markets perform. Importantly, this earnings level still leaves room for margin improvement through incremental scale. And, of course there is always the potential for a larger player to acquire WHG; just last year Americana Partners offered to acquire WHG at $25/share (nearly 2x current levels).”

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Westwood Holdings Group, Inc. (NYSE:WHG) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 7 hedge fund portfolios held Westwood Holdings Group, Inc. (NYSE:WHG) at the end of the second quarter which was 8 in the previous quarter. In addition, please check out our hedge fund investor letters Q2 2022 page for more investor letters from hedge funds and other leading investors.

Disclosure: None. This article is originally published at Insider Monkey.