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Here’s Why Headwaters Capital Sold its LendingTree (TREE) Stake

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Headwaters Capital, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of 2.8% was recorded by the fund for the third quarter of 2021, outperforming the Russell Mid Cap Index that delivered a -0.9% return for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Headwaters Capital, in its Q3 2021 investor letter, mentioned LendingTree, Inc. (NASDAQ: TREE) and discussed its stance on the firm. LendingTree, Inc. is a Charlotte, North Carolina-based online lending marketplace with a $1.8 billion market capitalization. TREE delivered a -50.02% return since the beginning of the year, while its 12-month returns are down by -58.10%. The stock closed at $136.83 per share on October 8, 2021.

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

"Sells: The LendingTree (“TREE”) sell decision was driven by a number of concerning trends that have materialized in 2021. Data from TREE's customers and competitors suggests that TREE is losing market share in the leadgeneration space for consumer financial products. TREE's entrance into new industry verticals (Medicare) combined with management turnover provide further evidence that the company is struggling in an increasingly competitive environment. Revenue pressure from softening mortgage refinance volumes and declining advertising budgets from auto insurers are also likely to be headwinds for TREE in the near-term. The summation of these developments led to the decision to exit the position."

Photo by Sharon McCutcheon on Unsplash

Based on our calculations, LendingTree, Inc. (NASDAQ: TREE) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. TREE was in 30 hedge fund portfolios at the end of the first half of 2021, compared to 25 funds in the previous quarter. LendingTree, Inc. (NASDAQ: TREE) delivered a -33.23% 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.