Voss Capital, an investment management firm, published its “Voss Value Offshore Fund” second-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly net return of +11.2% was delivered by the fund for the Q2 of 2021, ahead of its Russell 2000, Russell 2000 Value, and S&P 500 benchmark that delivered a +4.3%, +4.2%, and +8.5% return respectively for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
In the Q2 2021 investor letter of Voss Capital, the fund mentioned International Money Express, Inc. (NASDAQ: IMXI) and discussed its stance on the firm. International Money Express, Inc. is a Miami, Florida-based money remittance services company with a $715.7 million market capitalization. IMXI delivered an 18.40% return since the beginning of the year, while its 12-month returns are up by 13.29%. The stock closed at $18.40 per share on September 1, 2021.
Here is what Voss Capital has to say about International Money Express, Inc. in its Q2 2021 investor letter:
“We believe Intermex (International Money Express, IMXI) is a compelling long. IMXI is an international money remittance company that focuses primarily on transactions emanating from the United States and going to Mexico and Guatemala. They make their money by charging a fixed fee for each remittance transaction (85% of revenue), and to a lesser degree from foreign exchange arbitrage on transactions (14%). Their customer base is primarily low-income and under-banked immigrants from Mexico and Guatemala with family/friends remaining in their home country that need financial support. We believe IMXI is a simple story to understand, with a clean capital structure, very low capital intensity (outside of some working capital swings), a strong brand, savvy management, and excellent ongoing execution (e.g., 15-20% growth at high incremental margins). We believe there are flaws in the negative narrative surrounding the company that we can exploit, namely the skepticism around the sustainability of its growth, the stickiness of the customer base, and a misunderstanding about the economics of a digital remittance transaction versus in-person.
The consensus narrative on Wall Street is that IMXI is making a strategic error by not going “all in” on digital transactions, as MoneyGram (MGI), Western Union (WU), and well-backed private competitors like Remitly and Wise are. You will hear that the wave of the VC money shows you what the future beholds, and remittances initiated via physical brick & mortar stores are dying. As the digital transition occurs, Intermex will lose their customer base, and given the operating leverage in the model, profitability will be hit hard. Bears also argue that digital is cheaper, easier, and should create a stickier customer base in the long term. Furthermore, Intermex’s focus on only a few markets makes it hard to scale the business and they will quickly run into a wall on growth.
Voss has a variant view. After much polling of the customer base and study of the cultural drivers, we believe that IMXI’s customer base will be very slow to transition to digital as digital requires a bank account and can take longer for the funds to become available to the recipient in cash. With WU and MGI focusing on digital, IMXI continues to take in-person market share and capture an increasing amount of the superior unit economics that come with it. Digital has a much lower Lifetime Value (LTV)/Customer Acquisition Costs (CAC) ratio due to intense competition requiring high marketing costs and increasing “churn”. Digital also is not necessarily a cheaper way for customer to send money given that the digital players try to juice revenue with greater currency arbitrage to make up for the low advertised transaction fees, something we have found the astute customer base is keenly aware of. We would also argue IMXI’s in-person customer base is likely stickier than the overly digitalfocused Wall Street imagines. A worker stopping by the IMXI counter in the same store they are cashing their check or buying food is part of a routine and that convenience and familiarity is sticky. Management has noted that many of the customers who switched to using IMXI’s digital product last year during lockdowns returned to in-person when stores opened back up.
Intermex’s disciplined focus on a few markets instead of reaching for growth in every country allows it to dominate those highvolume corridors and take share consistently and profitably. In direct contradiction to the bearish sentiment and narrative, IMXI is consistently growing about 20% faster than competitors WU and MGI.
At its current valuation of ~8x NTM FCF and 7x EBITDA, the market’s expectations are exceptionally low on this 20% organic grower. We believe they can sustain 10%-20% growth, paving the way for the stock to double over the next 2-3 years through a combination of continued organic growth and some multiple expansion as the market realizes their runway is much longer than currently forecasted. Our price target is $29 (90% upside) based on 10x our 2023 EBITDA estimates. If the stock’s multiple does not improve between now and then, we believe there are both private equity and strategic acquirers who would be interested in buying the entire company.”
Based on our calculations, International Money Express, Inc. (NASDAQ: IMXI) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. IMXI was in 15 hedge fund portfolios at the end of the first half of 2021, compared to 18 funds in the previous quarter. International Money Express, Inc. (NASDAQ: IMXI) delivered an 18.43% 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.