Laughing Water Capital, an investment management firm, published its second-quarter 2022 investor letter – a copy of which can be downloaded here. For Q2 2022 Class A interests in Laughing Water Capital returned approximately -19.4%, bringing our year-to-date returns to approximately -29.5%. The SP500 and R2000 returned -16.1% and -17.2% for the quarter, bringing year-to-date returns to -20.0% and -23.4% respectively. Go over the fund’s top 5 positions to have a glimpse of its finest picks for 2022.
In its Q2 2022 investor letter, Laughing Water Capital mentioned Whole Earth Brands, Inc. (NASDAQ:FREE) and explained its insights for the company. Founded in 2020, Whole Earth Brands, Inc. (NASDAQ:FREE) is a Chicago, Illinois-based global food company with a $253.9 million market capitalization. Whole Earth Brands, Inc. (NASDAQ:FREE) delivered a -43.67% return since the beginning of the year, while its 12-month returns are down by -48.51%. The stock closed at $6.05 per share on August 19, 2022.
Here is what Laughing Water Capital has to say about Whole Earth Brands, Inc. (NASDAQ:FREE) in its Q2 2022 investor letter:
“Whole Earth, our alternative sweeteners business, currently trades around 6-7x my estimate of normalized FCF, versus packaged food peers at more than 20x. To be fair, the company has somewhat painted themselves into a corner as they have been pitching themselves as an M&A growth story, but after ~doubling revenue over the last 2 years, at present the balance sheet is full, and they do not have the equity cost of capital needed to continue to pursue M&A with equity.
Thus, the revenue growth story is on hold (although their category should grow faster than other packaged foods), which combined with some inflationary pressures has led to shares being punished. From my perspective, a stalled growth story is not great, but it is better than a continued growth story that is based on value destroying dilutive equity transactions: management deserves some credit for being disciplined. Further, debt paydown is a totally reasonable strategy to build equity value. The company is presently rebuilding the balance sheet, which at some point will likely be fire power for future M&A.
Putting the balance sheet aside, perhaps the most notable recent development is Martin Franklin bought ~14% of the equity during the quarter. No one is infallible, but at the very least it is curious to note that the last time Martin Franklin and FREE’s Chairman Irwin Simon worked together it was at Jarden Corporation, where Franklin compounded capital at 30% a year for 15 years before selling the business.
Again, there is no guarantee here that history will rhyme, but a low starting valuation is a prerequisite for that sort of compounding, so we are starting from a good place. How cheap does a stock have to be to partner with people that have an incredible history of buying and building businesses? Should we wait for 4x or 5x normalized FCF? Or should we plow ahead at 6-7x and just acknowledge that the road forward will have plenty of speed bumps?”
pablo-merchan-montes-Orz90t6o0e4-unsplash
Our calculations show that Whole Earth Brands, Inc. (NASDAQ:FREE) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Whole Earth Brands, Inc. (NASDAQ:FREE) was in 18 hedge fund portfolios at the end of the second quarter of 2022, compared to 15 funds in the previous quarter. Whole Earth Brands, Inc. (NASDAQ:FREE) delivered a -9.30% return in the past 3 months.
In March 2022, we also shared another hedge fund’s views on Whole Earth Brands, Inc. (NASDAQ:FREE) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q2 page.
Disclosure: None. This article is originally published at Insider Monkey.
