SVN Capital, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio gross return of 16.7%, and 15.3% net of all fees was recorded by the fund for the first half of 2021. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of SVN Capital, the fund mentioned HEICO Corporation (NYSE: HEI), and discussed its stance on the firm. HEICO Corporation is a Hollywood, Florida-based aerospace company, that currently has a $17.9 billion market capitalization. HEI delivered a 5.36% return since the beginning of the year, extending its 12-month revenues to 47.09%. The stock closed at $139.50 per share on July 08, 2021.
Here is what SVN Capital has to say about HEICO Corporation in its Q2 2021 investor letter:
“HEICO is a diversified aerospace and defense component supplier. It operates through two segments. In the Flight Support Group (FSG) segment, it manufactures aircraft parts for sale directly into the aftermarket via third-party parts manufacturer approval (PMA). In the Electronics Technologies Group (ETG), it sells to defense, space, and healthcare companies.
I added HEICO to the portfolio during the early stages of the pandemic in 2020 and wrote about it in the mid-year 2020 letter, which you can find here. Before the pandemic, the FSG segment, which sells directly to airlines and maintenance, repair, and operations, was the bigger of the two segments, generating almost 60% of total revenue. With the onset of the pandemic, this segment was hit hard. In the most recent quarter, which ended on April 30, 2021, the company announced an improvement in revenue and margins in this segment, much of it due to increased flight activity as vaccinated individuals resumed leisure travel.
As more airlines nurse their financial wounds on their way to recovery, I expect them to find HEICO’s products, sold at a significant discount to original equipment manufacturers’ cost, to be attractive.
Historically, the company has grown through acquisitions; it completed one in 2021 and has completed five in the past year. In this pandemic-impacted travel market, the company is being selective and is finding high-quality targets of various sizes.
Even though the stock has almost doubled from its low during the pandemic, I find the PMA business, unique acquisition strategy of not acquiring 100% of the target, decentralized operations, valuation, and cash-flow-focused culture of this owner-operated company to be attractive.”
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Our calculations show that HEICO Corporation (NYSE: HEI) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the first quarter of 2021, HEICO Corporation was in 45 hedge fund portfolios, compared to 44 funds in the fourth quarter of 2020. HEI delivered a 6.21% 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.
