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Here’s What Makes Upstart Holdings (UPST) A Great Stock Investment

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Alger, an investment management firm, published its “Alger Mid Cap Focus Fund” third quarter 2021 investor letter – a copy of which can be downloaded here. During the third quarter, the largest portfolio sector weightings were Information Technology and Health Care. The largest sector overweight was Industrials. The portfolio had no exposure to the Utilities or Energy sectors and negligible exposure to the Real Estate and Materials sectors. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Alger, in its Q3 2021 investor letter, mentioned Upstart Holdings, Inc. (NASDAQ: UPST) and discussed its stance on the firm. Upstart Holdings, Inc. is a San Mateo, California-based consumer lending company with a $26.6 billion market capitalization. UPST delivered an impressive 193.87% return since the beginning of the year, while its 12-month returns are massively up by 740.64%. The stock closed at $342.56 per share on October 22, 2021.

Here is what Alger has to say about Upstart Holdings, Inc. in its Q3 2021 investor letter:

"Upstart Holdings provides an online marketplace lending platform that is powered by artificial intelligence (Al). The platform facilitates the origination of prime and near prime unsecured consumer loans by acting as an intermediary between consumers and lending institutions, which is a capital-light model. Upstart’s core value proposition is using Al and alternative data to produce potentially high underwriting accuracy for its financing partners. Upstart differentiates its service with its Al-based models that incorporate more than 1,600 variables that they believe can more accurately quantify the risk of a loan. The system creates an automated and seamless loan product, which may generate higher approval rates and lower interest rates for customers, and a robust pipeline of consumer credit, lower loss rates and decreased fraud for bank partners.

Shares of Upstart outperformed in the recent quarter after the company said it delivered strong results for the second quarter and raised full-year 2021 guidance. In our view, the results showed that volume growth in the core personal loan business is strong as Upstart's marketing funnel is gaining scale benefits while earnings before interest, taxes, depreciation and amortization (EBITDA) margins are expanding and tracking well ahead of guidance. Upstart also continues to gain further traction in bank partnerships and make solid progress with its nascent auto loan product that is now available in 47 states. In our view, the results demonstrate that Upstart has the potential to address avery large market over the coming years in a highly profitable way, and that the company’s investments in growth initiatives are bearing fruit."

Finance, Investment, Investigate
Finance, Investment, Investigate

Photo by Scott Graham on Unsplash

Based on our calculations, Upstart Holdings, Inc. (NASDAQ: UPST) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. UPST was in 21 hedge fund portfolios at the end of the first half of 2021, compared to 13 funds in the previous quarter. Upstart Holdings, Inc. (NASDAQ: UPST) delivered a 4.48% 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.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest-growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks 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 homepage.

Disclosure: None. This article is originally published at Insider Monkey.