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Is Sonos (SONO) A Smart Long-Term Buy?

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Greenlight Capital, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly return of -2.6% was recorded by the fund for the third quarter of 2021, compared to the 0.6% for the S&P 500 index. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Greenlight Capital, in its Q3 2021 investor letter, mentioned Sonos, Inc. (NASDAQ: SONO) and discussed its stance on the firm. Sonos, Inc. is a Santa Barbara, California-based sound experience company with a $4 billion market capitalization. SONO delivered a 36.81% return since the beginning of the year, while its 12-month returns are up by 100.13%. The stock closed at $32.00 per share on October 22, 2021.

Here is what Greenlight Capital has to say about Sonos, Inc. in its Q3 2021 investor letter:

"We expanded what was a small position in Sonos (SONO) to a size that makes it worthwhile to discuss. We’ve owned SONO, which manufactures multi-room wireless smart home sound systems, for about a year. We were initially attracted by the strength of the brand and IP, SONO’s ecosystem dynamics, and signs that the company was under-earning. We’ve been impressed with management’s ability to consistently outperform both guidance and expectations amidst a rapidly changing macro environment. We think that there is a long-term household penetration story here: SONO products are currently in approximately 11 million homes globally, a number that has grown by at least 20% in each of the last 4 years and stands to grow further as SONO adds more accessible price points, expands into new verticals, and introduces new products and services. While we acknowledge that there are near-term headwinds in the form of supply chain disruptions and a cyclical normalization in consumer electronics demand, we think these will prove to be temporary distractions in an otherwise bright growth story. Between an elevated backlog of orders that will support demand well into the next year and strong pricing power, we see earnings growing close to 25% annually for the next few years. The stock currently trades at just over 15x FY2021 adjusted earnings net of the $5 cash per share on the balance sheet today. We purchased our stake at an average price of $28.45 per share. SONO shares ended the quarter at $32.36."

Sonos, Speaker
Sonos, Speaker

Photo by Charles Deluvio on Unsplash

Based on our calculations, Sonos, Inc. (NASDAQ: SONO) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. SONO was in 47 hedge fund portfolios at the end of the first half of 2021, compared to 46 funds in the previous quarter. Sonos, Inc. (NASDAQ: SONO) delivered a -4.16% 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.