Kinsman Oak Capital’s Alphabet (GOOG) Bull Case

Kinsman Oak Capital Partners Inc., an independent Toronto-based boutique investment firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A return of 6.4% was recorded by the fund for the Q4 of 2020, below both its S&P 500 and Russell 2000 benchmark that delivered a 12.2% and 31.4% return respectively, and also underperforming its TSX Composite Index that gained a 14.3% return. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Kinsman Oak Capital Partners, in their Q4 2020 Investor Letter, said that they have a controversial view on Alphabet Inc. (NASDAQ: GOOG) because they view it as a ‘not so expensive’ company. Alphabet Inc. is a holding company and the mother company of Google, that currently has a $1.4 trillion market cap. For the past 3 months, GOOG delivered a decent 19.75% return and settled at $2,095.38 per share at the closing of February 10th.

Here is what Kinsman Oak Capital Partners has to say about Alphabet Inc. in their Q4 2020 investor letter:

“Our view on Alphabet (GOOG) may be somewhat controversial. The bear case for GOOG boils down to antitrust risk and valuation. Our thesis is predicated on the belief that real earnings power, especially for Alphabet, is higher than it appears on the surface. At first glance, Alphabet’s P/E appears to be 30.2x. Adjusting for net cash brings this down to 27.9x. Alphabet’s “Other Bets” segment generates de minimis revenues but reduces operating income by 13%. Adjusting for that (and assigning zero value to a segment that includes Waymo, Nest, and Verily) brings the multiple to 24.7x versus the S&P 500 trading at 22.3x.

Alphabet, at a 10% premium to the S&P 500, is one of the biggest relative value bargains hiding in plain sight we have seen. Alphabet has a much deeper moat, better margin profile, less capex requirements, and faster growth profile than the average company within the index (estimated 18% CAGR for the next two years versus 8% for the S&P 500).

Pushing the envelope, Alphabet’s multiple would be lower than the overall market if the company treated stock-based compensation as dilution and/or if research & development was capitalized instead of expensed. Internally we use a more detailed sum-of-the-parts analysis to more closely approximate intrinsic value. Further, Waymo provides significant upside optionality, especially if you believe Tesla’s “full self driving” technology justifies a large portion of its market cap.

In short, we believe the obfuscated earnings power makes Alphabet appears more expensive than it really is. After adjusting for factors like “Other Bets” in Alphabet’s case or net cash, stock-based compensation, and research and development treatment, it becomes clear that investors are being adequately compensated for the associated antitrust and regulatory risk.”


Just recently, we published a Maplelane’s Top 5 Stock Holdings article, and Alphabet Inc. (NASDAQ: GOOG) is included in the list. In our recent data, the company was in 150 hedge fund portfolios, its all time high statistics. GOOG delivered a 38.34% return in the past 12 months.

Our calculations show that Alphabet Inc. (NASDAQ: GOOG) ranks 7th in our list of the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

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