Smaller company inefficiencies do exist. And we can take advantage of them.
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Smaller company inefficiencies do exist. And we can take advantage of them.
Smaller company inefficiencies do exist. And we can take advantage of them.
Smaller company inefficiencies do exist. And we can take advantage of them.
We spend a lot of time talking about market inefficiencies especially in smaller companies and so this month it's timely to highlight a situation that played out this month.
Below is a price chart of the last 4months for Medpace Holdings. You will see that over the course of one day the price moved ~38%!
While we were thrilled with the near 40% one day return, we were even happier it was not due to a takeover announcement but due to a sizeable earnings beat and increase to their guidance (which means we get to remain owners of the business and benefit from its bright future). The value of the business increased close to US$2B in one day.
These are the sorts of inefficiencies that exist in smaller companies.
The reality is they aren’t often this significant and they can occur in both the positive and negative direction. In fact, this inefficiency was incubated over 2022 while price and value began to meaningfully dislocate in our favour.
Medpace Holdings is one of our largest investments and a business we spent years getting to know and have owned since inception here at Langdon. It was our first site tour of 2022 as well. Back in March of this year Isaac, Alex and I undertook the pilgrimage to Cincinnati Ohio (flights were still not an option so it became a road trip!) to spend the morning with the management team and visit their campus.
Since the beginning of the year there had been significant concern around the state of the biotech funding market and the valuation was high relative to what we wanted to pay. We owned a small weight and after they reported in early March we saw the stock decline about 30% and decided it was important to see the whites of the eyes of the team behind the business and get a deeper look at how the campus had built out given headcount had more than tripled over the last 5 years. Before deciding whether to invest additional capital into the business we tend to really value access to management and also aren’t afraid to do our own work (company as well as the sell-side were quite negative on the short term revenue for the business while our sources saw a very strong ST and MT for the business).
In the end, we took the weight up significantly and it was a mosaic of factors that allowed us to gain that conviction, with a key element being our time spent with the management team. 95% of the days in the market we do nothing but roughly once a month there is something important to do and in March of 2022 it was visit Medpace before deciding to take advantage of the steep correction in their shares.
We won’t get them all right, but we hope to get enough right to deliver world class performance over the long-term. We believe we own a collection of 30 high quality, well run and very mispriced companies, hopefully this example of what we mean when we say inefficient markets was helpful.
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