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Here’s Why Madison Funds Sold its Fastenal Company (FAST) Position

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Madison Funds, an investment management firm, published its “Madison Mid Cap Fund” second-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio return of 6.58% was recorded by the fund’s Class Y shares for the second quarter of 2021, compared to the Russell Midcap® Index's gains of 7.50% for the same period. 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 Madison Funds, the fund mentioned Fastenal Company (NASDAQ: FAST) and discussed its stance on the firm. Fastenal Company is a Winona, Minnesota-based industrial supplies company with a $31.6 billion market capitalization. FAST delivered a 12.76% return since the beginning of the year, extending its 12-month returns to 14.23%. The stock closed at $55.06 per share on August 19, 2021.

Here is what Madison Funds has to say about Fastenal Company in its Q2 2021 investor letter:

"We purchased two new investments and sold one. The sale was of Fastenal, a long-time holding and one of the largest industrial supply distributors in the country. We purchased our stake in 2014, and we near-tripled that original investment through capital appreciation and dividends, handily outpacing our index, the Russell Midcap. It’s possibly one of the best-managed companies we’ve ever had the pleasure of getting to know, but we felt that the valuation ascribed to its shares more than reflected its outlook. This was our second go-around with Fastenal, having invested in it successfully almost two decades ago as well. We’re sorry to have to let it go, but perhaps there will be a third bite at the apple somewhere down the road."

Bolts, Tools, Screws, Hardware
Bolts, Tools, Screws, Hardware

Photo by Tekton on Unsplash

Based on our calculations, Fastenal Company (NASDAQ: FAST) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. FAST was in 25 hedge fund portfolios at the end of the first half of 2021, compared to 24 funds in the previous quarter. Fastenal Company (NASDAQ: FAST) delivered a 5.20% 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.