If you are looking for the best ideas for your portfolio you may want to consider some of Spree Capital Advisers top stock picks. Spree Capital Advisers, an investment management firm, is bullish on Covetrus Inc. (NASDAQ:CVET) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Covetrus Inc. (NASDAQ:CVET) stock. Covetrus Inc. (NASDAQ:CVET) is a veterinary services company.
In July 2019, Spree Capital Advisers had released its Q2 2019 investor letter. Covetrus Inc. (NASDAQ:CVET) stock has posted a return of 72.4% in the trailing one year period, outperforming the S&P 500 Index which returned 8.4% in the same period. This suggests that the investment firm was right in its decision. On a year-to-date basis, Covetrus Inc. (NASDAQ:CVET) stock has risen by 55.4%.
In Q2 2019 investor letter, Spree Capital Advisers said the fund posted a return of 0.69% in the second quarter of 2019, underperforming fund's benchmark the S&P 500 Index which returned 4.30% in the same period. Let’s take a look at comments made by Spree Capital Advisers about Covetrus Inc. (NASDAQ:CVET) stock in the Q2 2019 investor letter.
"Covetrus (CVET) is an animal health technology and service company. Formed as a result of a Reverse Morris Trust merger transaction between Henry Schein Animal Health and venture capital backed animal health technology company Vets First Choice, Covetrus is currently trading near its 52-week low due to typical spin off dynamics, and one time, pre-spin organic growth headwinds. A key part of our investment process is that we must have a differentiated view, supported by our research, that we believe will eventually become widely held as earnings growth comes to fruition. With Covetrus, we believe that as the merger is integrated, it will become clear that in this deal, 1+1=3.
Central to understanding the opportunity in Covetrus is understanding the business of a veterinarian. Veterinarians manage a wide variety of complex medical services for a wide variety of species, all while running laboratories, surgery centers, pharmacies, and retail stores. Covetrus helps veterinarians run their diverse businesses by simplifying the administrative tasks of the practice, while increasing coordination between medical records and prescription management technology. In simplifying the management of the practice, Covetrus not only reduces inventory and shrink, which frees up cash flow and grows margins, but more importantly, allows a veterinarian to focus on their core competency of delivering healthcare to animals, and services to pet owners.
We see five stages in the path to value creation at Covetrus. First, Covetrus will increase penetration of the Vets First Choice platform across the Henry Schein Animal Health network. Vets First Choice was previously a startup in hypergrowth phase that was constrained by sales and customer service resources. The merger with Henry Schein Animal Health brings a significantly larger sales force with a relationship network that will help grow penetration from the current 8,000 practice footprint to the existing 100,000 Henry Schein Animal Health customer footprint.
Second, as the Vets First Choice platform penetration grows, the addressable market grows. Addressable market growth comes from eliminating gaps in care by increasing medication compliance, from returning sales to the vet from online channels, from increasing sales of private label and compounded medication products, and from growing end markets.
Third, Covetrus increases the lifetime value of the customer through increased sales and increased customer captivity. The Vets First Choice platform offers customer analytics and insights which help the vet practice grow revenue streams. In doing so, Covetrus creates opportunities to upsell products (consumables, equipment) and services (business clinics, financial services, inventory management, professional development). The increase in purchasing frequency, and increased usage of operating services raises switching costs and barriers to entry, which increases the lifetime value of the customer, effectively growing the moat around Covetrus’ business.
Fourth, the maturity curve of Covetrus customer sales has a long tail of growth. Vets First Choice customers typically start slow on the platform in the first year, and then the ramp in years 1-5 shows double digit annual sales growth. Covetrus’ increased sales force and high touch service offering create value by fixing any integration issues that could potentially cause churn in the first year before the strength of the business model goes into effect.
Fifth, as sales per location grow, the benefits of the distribution footprint create value. Specifically, the scale that Henry Schein Animal Health has from its position as the largest global distributor of animal veterinary products spreads the benefits of increased inventory turns across the fixed costs of 54 distribution centers worldwide, and creates more efficient truck rolls for deliveries, and the sales people who visit the 100,000 veterinary clinics every two weeks.
The aforementioned self-help initiatives are all backed by secular tailwinds from increasing companion animal ownership globally, and the “humanization of pets” flywheel which feeds increased spending on pets, causing pets to live longer, further causing an increasing range and complexity of medical diagnostics, therapies, and procedures for companion animals. In conclusion, we believe that Covetrus is in the early innings of growing the moat around the business which will lead to long term compound growth in earnings and shareholder value."
In Q1 2020, the number of bullish hedge fund positions on Covetrus Inc. (NASDAQ:CVET) stock increased by about 10% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with Covetrus's growth potential. Our calculations showed that Covetrus Inc. (NASDAQ:CVET) isn't ranked among the 30 most popular stocks among hedge funds.
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Disclosure: None. This article is originally published at Insider Monkey.