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Lakehouse Capital, an investment management firm, published its "Global Growth Fund" second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly return of 33.2% net of fees and expenses, was recorded by the fund for the second quarter of 2021, compared to 27.7% for its benchmark. 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 Lakehouse Capital, the fund mentioned PayPal Holdings, Inc. (NASDAQ: PYPL), and discussed its stance on the firm. PayPal Holdings, Inc. is a San Jose, California-based online payments system company, that currently has an $323.6 billion market capitalization. PYPL delivered a 17.65% return since the beginning of the year, extending its 12-month returns to 40.53%. The stock closed at $275.53 per share on July 30, 2021.
Here is what Lakehouse Capital has to say about PayPal Holdings, Inc. in its Q2 2021 investor letter:
"PayPal had a tremendous year as it was a significant beneficiary in the pull-forward in ecommerce. Total payment volume increased by 50% year-on-year through the first quarter of 2021 thanks to significant growth in users and merchants. The company now has 392 million active users, up 20.6% from March 2020, who use PayPal an average of 42 times a year. The significant growth in users and activity both look structural to us, not cyclical, and we doubt the six-million-plus merchants who began accepting PayPal in the past year will suddenly stop accepting one of the internet’s most widely used forms of payment.
PayPal is a prime example of how a widely followed business can still be chronically misunderstood. FactSet tracks 48 analysts who publish price targets on the stock, suggesting PayPal’s shares should be efficiently priced, and yet PayPal has beaten analysts’ average sales and earnings estimates in 18 of the 21 quarters since it was spun off from eBay. We suspect the market tends to underestimate the business’ inherent operating leverage and that the lifetime values of incremental new users continue to rise over time thanks to improving functionality and a growing merchant base that allows new users to spend PayPal more widely than did their predecessors.
We continue to think that PayPal has a considerable growth runway not only from gaining share of a large, growing market via its core platform but also from new tools and functionality including an enhanced instore experience, crypto offerings, Pay with Venmo, and buy now, pay later. The business isn’t sitting still despite its strong position and we look forward to what the future holds."
Based on our calculations, PayPal Holdings, Inc. (NASDAQ: PYPL) ranks 8th in our list of the 30 Most Popular Stocks Among Hedge Funds. PYPL was in 143 hedge fund portfolios at the end of the first quarter of 2021, compared to 147 funds in the fourth quarter of 2020. PayPal Holdings, Inc. (NASDAQ: PYPL) delivered a 5.05% 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.