Tao Value recently released its Q1 2020 Investor Letter, a copy of which you can download here. The fund posted a return of -12.96% for the quarter, outperforming their benchmark, the MSCI All Country World Index (ACWI) which returned -21.05% in the same quarter.
In the said letter, Tao Value highlighted Credit Acceptance Corp (NASDAQ:CACC) and Alliance Data Systems Corp (NYSE:ADS) stocks. Credit Acceptance is an auto finance company. Alliance Data Systems is a leading provider of data-driven marketing, loyalty and payment solutions. Here is what Tao Value said:
“On the losing side, our top 3 detractors’ stock price were all hammered due to their heavy exposure to COVID-19 pandemic. Credit Acceptance (ticker: CACC) & Alliance Data Systems (ticker: ADS) are impacted due to their credit exposure to low tier consumers whose financial wellbeing will significantly deteriorate as the economy keeps shut down. Based on CACC’s history, it benefited from 08-09 crisis in as its more aggressive competitors gave up market shares since they were impacted worse, or even wiped out. However, this pandemic is different than the last financial crisis in that it may fundamentally alter the indispensability of cars to unprivileged classes – the cornerstone of CACC business model – at least for an extended period. For example, stay-at-home/work-from-home will lead to much less people needing cars to “go to work”, and if some UBI-like benefit program becomes new norm, unprivileged may become less unprivileged and may not want to work. I expect all these changes will lead to higher inclination of borrowers to default on auto loans, compared to past crisis. I thus decided to trim CACC, which has remained one of our top positions for years, to a moderate but still meaningful position.”
In Q4 2019, the number of bullish hedge fund positions on CACC stock increased by about 24% from the previous quarter (see the chart here).
In Q4 2019, the number of bullish hedge fund positions on ADS stock increased by about 15% from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.