White Brook Capital, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of 25.42% was delivered by the fund for the Q1 of 2021, ahead of its S&P 500 and S&P Midcap 400 benchmarks that delivered a 6.2% and 13.47% returns respectively for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
White Brook Capital, in their Q1 2021 investor letter, mentioned Conduent Incorporated (NASDAQ: CNDT), and shared their insights on the company. Conduent Incorporated is a Florham Park, New Jersey-based business process services company that currently has a $1.4 billion market capitalization. Since the beginning of the year, CNDT delivered a 39.30% return, extending its 12-month gains to 189.46%. As of April 27, 2021, the stock closed at $6.75 per share.
Here is what White Brook Capital has to say about Conduent Incorporated in their Q1 2021 investor letter:
“During the 1st quarter, White Brook built a position in Conduent. Conduent operates in three divisions: Commercial, Government Services, and Transportation. The Government Services and Commercial divisions perform similar call center, processing, and administrative services. The Transportation segment also runs tollways and traffic ticketing systems. Their services are necessary, but typically non-core to their customers and can be done more cheaply by a scaled player like Conduent than could be done in house. The services are also unlikely to drive a customer’s purchase decision although they significantly impact the customer’s experience. Potential customers want someone with experience, that will do the job well, and don’t want to think too much about it. Larger enterprises also need a provider that has the resources to scale as necessary (product launch) and monitor their employees. This is the business process outsourcing industry of which Conduent is amongst the largest.
Five years ago I would not have considered Conduent a potential investment candidate, ten years ago I wrote off investors for even suggesting it (Xerox). The Company was birthed by Xerox in December of 2016 by spinning assets from legacy Xerox and recently acquired Affiliated Computer Systems. After becoming public at ~$15 per share, the stock traded to $23 by the end of 2018 before beelining to a Covid low of ~$2. During that time, the Company went through multiple chief executives and Board
Chairmen and a fight with largest shareholder Carl Icahn that included a burn it all down letter from a board member in April 2019 alleging board malfeasance. That move ultimately resulted in Cliff Skelton’s appointment to interim CEO, and his permanent appointment in February of 2020.The corporate chaos was reflected internally as the company lost major contracts, was accused of bribery, and both customer and employee satisfaction deteriorated prior to Skelton’s appointment. Since, a culture change has occurred at the Company. Overall employee satisfaction has improved significantly. With increased satisfaction, employee retention has improved, resulting in improved relationships with clients and an improvement in customer churn. After years of losing business, the company is finally growing early indicators of revenue with new business signings and total contract values of new business growing. As a further sign of the different approach, customers that previously terminated relationships with Conduent due to non performance have not only reopened doors but awarded contracts to Conduent. From a financial analyst’s perspective, the Company more routinely meets or exceeds earnings expectations. There’s still more work to do, and the recovery is likely to be uneven, but Conduent has already turned around. As large contract losses under previous management finally roll off that will become evident to the uninterested as well.
There are additional tailwinds as well:
● There’s potential for an accretive sale of one or more of its business lines. The Company engaged in a review of its businesses when Skelton became CEO pre-pandemic, but any subsequent process was cut short as global business activity deteriorated.
● The Company should be a beneficiary of a return to work, whether that be via processing toll and ticket fees or providing support for insurance carriers – bouying near and medium term results.
● There’s potential opportunity in keeping some of the workforce at home and rationalizing real estate. Employees on message boards seem to like the experience of working from home over working in a call center even over a year later. The industry as a whole could have a permanently lower cost base. It remains to be seen whether those savings would be passed on to the customer, but if so, it then expands the market and opens their services to a smaller business.
● Finally, during the quarter, management voted with their own dollars, buying a modest amount of stock in the open market at a time when most management teams are selling a portion of their holdings.
The Company trades at a double digit free cash flow yield and less than 6x next year’s EBITDA – an appropriate multiple for a melting ice cube, but not a company that grows. I am excited by what the future holds for our investment in Conduent.”
Our calculations show that Conduent Incorporated (NASDAQ: CNDT) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Conduent Incorporated was in 17 hedge fund portfolios, compared to 16 funds in the third quarter. CNDT delivered a 39.35% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 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. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best innovative stocks to buy to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website:
Disclosure: None. This article is originally published at Insider Monkey.
