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Is Selling Your Wayfair (W) Stake a Good Option?

·3 min read

Vulcan Value Partners, an investment management firm, published its second-quarter 2022 investor letter – a copy of which can be downloaded here. All five of the fund's strategies trailed their respective benchmarks during the quarter. The good news is that across its portfolios most of its companies are performing well fundamentally. Go over the fund’s top 5 positions to have a glimpse of its finest picks for 2022.

In its Q2 2022 investor letter, Vulcan Value Partners mentioned Wayfair Inc. (NYSE:W) and explained its insights for the company. Founded in 2002, Wayfair Inc. (NYSE:W) is a Boston, Massachusetts-based online store company with a $5.6 billion market capitalization. Wayfair Inc. (NYSE:W) delivered a -71.85% return since the beginning of the year, while its 12-month returns are down by -81.63%. The stock closed at $53.48 per share on August 26, 2022.

Here is what Vulcan Value Partners has to say about Wayfair Inc. (NYSE:W) in its Q2 2022 investor letter:

"We sold Wayfair Inc. (NYSE:W) during the quarter. It was a mistake. Wayfair Inc. is a leading e-commerce retailer for home goods and furnishings. Prior to our initial investment, we watched Wayfair build its business. As customers increased, revenue per customer expanded, and the company grew year over year. Wayfair invested heavily in its logistics network to handle big and bulky furniture from freight forwarding all the way to last mile delivery. We believed this created a positive flywheel.

Wayfair became a more cost-effective distribution channel for suppliers, reduced delivery times to customers, and improved its customer shopping experience. Nonetheless, at the time, Wayfair did not produce free cash flow, and therefore it did not qualify for investment. During the pandemic, consumer behavior changed, and as a result, the company’s margins and free cash flow reached levels previously not expected for many years to come. We believed the competitive dynamics had changed for the long term in favor of Wayfair and the company qualified for investment.

We initially purchased Wayfair in the fourth quarter of 2020. Although we knew Wayfair would face difficult comparisons post-COVID, we believed the company would continue to generate free cash flow and its value would continue to be stable. The recent combination of persistently high levels of inflation, a possible recession, and the company’s commitment to continue investing heavily for future growth has resulted in negative free cash flow. We believe sustainable free cash flow is the key ingredient to long-term value stability and the company’s future free cash flow is in question. Therefore, we followed our discipline and sold Wayfair."

Pixabay/Public Domain

Our calculations show that Wayfair Inc. (NYSE:W) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Wayfair Inc. (NYSE:W) was in 27 hedge fund portfolios at the end of the second quarter of 2022, compared to 28 funds in the previous quarter. Wayfair Inc. (NYSE:W) delivered a -9.42% return in the past 3 months.

In May 2022, we also shared another hedge fund’s views on Wayfair Inc. (NYSE:W) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q2 page.

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