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Here’s Why Lakehouse Capital Sold its Twilio Inc. (TWLO) Position

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Lakehouse Capital, an investment management firm, published its "Global Growth Fund" second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly return of 33.2% net of fees and expenses, was recorded by the fund for the second quarter of 2021, compared to 27.7% for its benchmark. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Lakehouse Capital, the fund mentioned Twilio Inc. (NYSE: TWLO), and discussed its stance on the firm. TWLO, Inc. is a San Francisco, California-based cloud communications platform, that currently has an $64.9 billion market capitalization. TWLO delivered an 11.13% return since the beginning of the year, while its 12-month returns are up by 35.60%. The stock closed at $392.20 per share on July 29, 2021.

Here is what Lakehouse Capital has to say about Twilio Inc. in its Q2 2021 investor letter:

"The Fund held 20 positions as of the end of June and exited four during the year (including) Twilio. The companies we exited were sold almost entirely on the basis of their valuations getting stretched well past their norms and to levels where the return profile no longer offered the asymmetric upside that led us to invest in the first place. We dislike selling on valuation as great growth companies are hard to find and letting winners run is an important facet of a winning growth strategy, however, we’re not gluttons for punishment either and in each of those cases we redeployed capital towards other high-quality growth companies with less demanding valuations."

Based on our calculations, Twilio Inc. (NYSE: TWLO) ranks 20th in our list of the 30 Most Popular Stocks Among Hedge Funds. TWLO was in 99 hedge fund portfolios at the end of the first quarter of 2021, compared to 94 funds in the fourth quarter of 2020. Twilio Inc. (NYSE: TWLO) delivered a 2.31% 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.