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Here’s Why FedEx (FDX) Became Longleaf Partners’ Largest Q3 Detractor

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  • FDX
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Longleaf Partners Fund, a Memphis-based fund under Southeastern Asset Management, published its “Longleaf Partners Fund” third quarter 2021 investor letter – a copy of which can be downloaded here. Longleaf Partners Fund fell 5.70% in the third quarter, while the S&P 500 Index returned 0.58%. The Fund remains ahead of the index year-to-date (YTD), up 16.38% vs. the S&P’s 15.92%. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Longleaf Partners Fund, in its Q3 2021 investor letter, mentioned FedEx Corporation (NYSE: FDX) and discussed its stance on the firm. FedEx Corporation is a Memphis, Tennessee-based transport company with a $67.4 billion market capitalization. FDX delivered a -2.21% return since the beginning of the year, while its 12-month returns are down by -6.63%. The stock closed at $253.88 per share on November 12, 2021.

Here is what Longleaf Partners Fund has to say about FedEx Corporation in its Q3 2021 investor letter:

"FedEx reported a slightly disappointing quarter, as margins decreased due to cost inflation. We wonder if this could be a preview of what happens with other S&P 500 companies in the months to come (FedEx reports late in the quarter). What those companies don’t have is the incredible pricing power of FedEx to eventually pass through those costs, and we also still see a path to improved FCF conversion both in absolute terms and vs. core competitor UPS, leading to various ways that the multiple gap between these two companies can close.

FedEx (-25%, -1.32%), the B2B and e-commerce global logistics company, was our largest detractor for the quarter. Revenues continued to grow very well across all three segments, with Freight standing out at +23% year-over-year. Yet Ground margins declined by 1.6 percentage points due to the labor shortage and associated wage cost inflation, as FedEx is hiring over 80,000 employees this year. The company therefore cut its full-year earnings guidance by 5% and now trades around 11x earnings per share (EPS). UPS with less growth and much more dangerous Amazon dependence trades at 17x, implying a FedEx value similar to our appraisal. Despite the stock’s significant appreciation over the last year, we believe it remains very cheap. We also expect to see capital allocation contribute going forward as the gap between EPS and FCF closes while the company has an outstanding repurchase authorization."

Fedex FDX
Fedex FDX

Based on our calculations, FedEx Corporation (NYSE: FDX) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. FDX was in 61 hedge fund portfolios at the end of the first half of 2021, compared to 63 funds in the previous quarter. FedEx Corporation (NYSE: FDX) delivered a -8.41% 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. Recently we came across a high-growth stock that has tons of hidden assets and is trading at an extremely cheap valuation. We go through lists like the 10 best growth stocks to buy 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.