Pershing Square Holdings, Ltd., an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. For the first half of 2021 and year-to-date through August 17, 2021, the Company’s NAV per share, including dividends, increased by 7.3% and 5.8%, respectively, and the Company’s share price increased by 4.7% and 2.0%, respectively, compared with the S&P 500 which returned 15.2% and 19.5% over the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Pershing Square Holdings, the fund mentioned Lowe's Companies, Inc. (NYSE: LOW) and discussed its stance on the firm. Lowe's Companies, Inc. is a Mooresville, North Carolina-based retail company with a $142.2 billion market capitalization. LOW delivered a 27.99% return since the beginning of the year, while its 12-month returns are up by 23.86%. The stock closed at $205.43 per share on September 28, 2021.
Here is what Pershing Square Holdings has to say about Lowe's Companies, Inc. in its Q2 2021 investor letter:
"Since the onset of the COVID-19 pandemic, Lowe’s has experienced a signifi cant acceleration in demand driven by consumers nesting at home, higher home asset utilization and the reallocation of discretionary spend. In the three years since Marvin Ellison became CEO, the company has executed a multi-year transformation plan to bolster Lowe’s retail fundamentals, reduce structural costs, expand distribution capabilities, and modernize systems and the company’s online capabilities. This transformation has allowed Lowe’s to meet consumers’ needs during this highly elevated period of demand, and positioned the company for continued success and accelerated earnings growth.
In the second quarter, Lowe’s reported U.S. same-store-sales growth of 2.2%. Growth was bolstered by strength from the critical Pro consumer, where Lowe’s reported growth of 21%, off setting moderating do-it-yourself (“DIY”) demand. While DIY demand has receded from peak-COVID-19 periods, Pro customer demand has accelerated as consumers engage Pro’s for larger renovation projects.
Notwithstanding the headline growth fi gure, which is impacted by comparisons to COVID-19-aff ected months from spring of 2020, demand remains extremely elevated relative to baseline 2019 levels. July same-store-sales, the most recent full month for which the company has provided disclosure, were up 31.5% on a two-year basis and management indicated August month-to-date results are substantially similar. More signifi cantly, Lowe’s reported Pro growth of +49% on a two-year basis in Q2, evidence that Lowe’s focus on the Pro is bearing fruit. Share gains with the critical Pro customer will provide a tailwind to growth that should allow Lowe’s to outperform market-level growth going forward.
Even as the robust demand experienced during the height of COVID-19 stabilizes at a new base, the medium and longer-term macro environment remain very attractive for the home improvement sector and Lowe’s in particular. This favorable context for the sector is evidenced by consumers’ enhanced focus and appreciation of the importance of the home, higher home asset utilization, rising home prices, historically low mortgage rates, an aging housing stock, strong consumer balance sheets, and the general lack of new housing inventory.
Against this backdrop, Lowe’s is focused on taking market share and expanding margins. Pro penetration today is still only 25% of revenue as compared to Lowe’s medium-term target of 30% to 35%, providing a runway for continued abovemarket growth. Management continues to execute against various operational initiatives (Lowe’s “Perpetual Productivity Improvement” program) designed to improve the customer experience while enhancing the company’s margins and longterm earnings power. The company’s long-term outlook implies signifi cant opportunity for continued margin expansion and earnings appreciation as it executes its business transformation.
Lowe’s currently trades at approximately 17 times forward earnings. Home Depot, its closest competitor, trades at approximately 22 times forward earnings despite Lowe’s superior prospective earnings growth. We find this valuation disparity to be anomalous in light of Lowe’s strong execution and potential for further operational optimization."
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Based on our calculations, Lowe's Companies, Inc. (NYSE: LOW) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. LOW was in 63 hedge fund portfolios at the end of the first half of 2021, compared to 61 funds in the previous quarter. Lowe's Companies, Inc. (NYSE: LOW) delivered a 5.91% 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.
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