Merion Road Capital Management, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly return of 11.2% was reported by the fund’s Long Only Large Cap Fund, while its Long Short Small Cap Fund delivered a 14.0% gain in the second quarter of 2021, outperforming its Russell 2000, Barclay Hedge Fund, and S&P 500 benchmarks that delivered a 4.0%, 4.0%, and 8.4% returns respectively for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Merion Road Capital Management, the fund mentioned Copart, Inc. (NASDAQ: CPRT) and discussed its stance on the firm. Copart, Inc. is a Dallas, Texas-based used car dealers company with a $33.4 billion market capitalization. CPRT delivered an 11.12% return since the beginning of the year, extending its 12-month returns to 38.05%. The stock closed at $141.40 per share on August 24, 2021.
Here is what Merion Road Capital Management has to say about Copart, Inc. in its Q2 2021 investor letter:
"Many of our companies reported very strong earnings back in April. The market shrugged these off as it pondered how much growth would be sustainable, are inflationary trends transitory, and when interest rates will rise. While a slow-down in the broader economic recovery would hurt our portfolio, I remain positive on our position’s market positioning and longer term trends.
For instance, Copart reported 33% YoY revenue growth with EBIT margins expanding to 45%, an all-time high. While the company benefitted from inflation (an interesting hedge the market largely ignored earlier in the year), sustainable increases in ASPs and service offerings bode well for revenue per vehicle growth. Management noted that traffic is still down 20% or more as non-US markets are several months behind the United States on reopening and vaccinations. This volume boost should provide good tailwinds in the coming months."
Photo by Dieny Portinanni on Unsplash
Based on our calculations, Copart, Inc. (NASDAQ: CPRT) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. CPRT was in 44 hedge fund portfolios at the end of the first half of 2021, compared to 49 funds in the previous quarter. Copart, Inc. (NASDAQ: CPRT) delivered a 10.55% 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.