Compounder Fund: Portfolio Update (January 2024) - 12 Jan 2024
Jeremy and I intend to share frequent but non-scheduled updates on how Compounder Fund’s portfolio looks like. The last time we shared an update on this was for Compounder Fund’s portfolio as of 04 December 2023.
In it, I shared that we had fully exited Illumina and Upstart; our theses for their sales can be found here and here, respectively. I also mentioned that Compounder Fund held 47 companies and that we used the cash from the sales of Illumina and Upstart to add to the fund’s positions in Paycom Software and The Trade Desk. Since then, Alteryx has been sold from the portfolio.
Alteryx, which provides a software platform for companies to easily run complex data analytics, announced in mid-December 2023 that it would be acquired for US$48 per share in cash by two private equity firms, Clearlake Capital and Insight Partners. The deal is expected to close in the first half of 2024. We sold Alteryx in early-January 2024 at US$47 per share, which is just a hair’s breadth from the acquisition price. Alteryx has been a disappointing investment for us, given that our initial investments in the company in July 2020 were made at an average stock price of US$170. Alteryx had been in our Potential Sell list for some time given its relatively lacklustre revenue growth in recent quarters, and poor free cash flow margins stretching over multiple quarters – both are shown in Table 1 below. Over the three-plus years of Compounder Fund’s ownership of Alteryx’s shares, we had been increasingly leaning towards the thought that we were wrong about the company’s growth prospects and its business-quality. The announcement of the acquisition, the fact that Alteryx’s stock price was nearly at the offered price, and our desire to add to an existing Compounder Fund holding, made it easy for us to sell before the deal closed.
Table 1; Source: Companies’ earnings updates
Compounder Fund is able to accept new subscriptions once every quarter with a dealing date that falls on the first business day of each calendar quarter. Jeremy and I have successfully closed Compounder Fund’s 13th subscription window since its initial offering period (which ended on 13 July 2020). Part of the new capital raised, together with the proceeds from Alteryx’s sale, was deployed quickly in the days after the last subscription window’s dealing date of 2 January 2024 and we added to one existing Compounder Fund holding: Medpace.
We first invested in Medpace, a company that helps biotechnology companies plan and run their drug trials (see our thesis for more), in August 2022. Since then, Medpace’s results have continued to impress us and management has also conducted buybacks intelligently, signalling astute capital allocation. Table 5 shows Medpace’s revenue growth and net income and free cash flow margins over the past few quarters – notice the healthy increases in revenue and the strong margins. As for Medpace’s buybacks, management has conducted stock buybacks over the past few quarters when valuations were attractive. For example, Medpace spent US$120 million on buybacks in the first quarter of 2023 (it is the largest buyback for Medpace during a quarter in 2023 so far) at an average share price of US$185 when the company’s P/FCF (price to free cash flow) ratio was just 18; Medpace’s stock price ended 2023 at US$307. Adding cherries to the cake are three things. Firstly, Medpace has produced the impressive revenue growth rates seen in Table 2 even though biotechnology companies in general have been facing funding difficulties. Secondly, I shared in the “More thoughts on artificial intelligence” section of our 2023 third-quarter letter that “our [Medpace] thesis included the possibility that AI could be a long-term tailwind for the development of biotechnology drugs” and that “we’ve observed more positive signs on AI’s impact on the biotechnology space” since our investment. Thirdly, Medpace’s trailing P/FCF ratio at the end of 2023 was an attractive 22.
Table 2; Source: Medpace earnings updates
Here’s how Compounder Fund’s portfolio of 46 companies looks like as of 7 January 2024:
Table 3
We’re sharing all this information with the public and with the fund’s investors for two reasons. First, we believe deeply in investor education and want Compounder Fund’s return and actions to be a source for people to learn about investing. Second, we believe that this transparency will help investors of Compounder Fund develop comfort with our investing process over time, which is great; in turn, this will also free us from the time-consuming activity of dealing with questions on how we invest, and thus give us more to invest better for our investors.
And here’s an important disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation; they are merely our thoughts that we want to share. Holdings are subject to change at any time.
