Richie Capital on Fair Issac (FICO)’s Pullback: “We View this Decline as a Buying Opportunity”

·4 min read

Richie Capital Group, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of -5.0% was recorded by the RCG Long Only strategy for the third quarter of 2021, while the RCG Long Short Fund lost -5.3%. The fund’s closest benchmarks, the Russell 3000 Index and the Equity Long-Short Index returned -0.1% and -0.2% respectively for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Richie Capital Group, in its Q3 2021 investor letter, mentioned Fair Isaac Corporation (NYSE: FICO) and discussed its stance on the firm. Fair Isaac Corporation is a San Jose, California-based analytics company with an $11.6 billion market capitalization. FICO delivered a -20.27% return since the beginning of the year, while its 12-month returns are down by -6.76%. The stock closed at $397.26 per share on October 13, 2021.

Here is what Richie Capital Group has to say about Fair Isaac Corporation in its Q3 2021 investor letter:

"Fair Isaac Corp (FICO – down 18.84%) – The stock price for the predictive analytics software firm has declined off of very little news outside of an article in the Wall Street Journal highlighting the increasing competitive threats. We view much of this as known. Anytime a company dominates a market in a monopoly-like manner, it will naturally attract competitors as well as customers who will attempt to push back on pricing. However, their solutions are highly predictive within the subprime market and the company continues to identify new opportunities for their software solutions. FICO reported a solid Q3 in August beating earnings and revenue estimates. The report seemed to imply slowing revenue growth, specifically in their DMS and Applications revenue. We believe the market is missing the bigger picture. FICO is transitioning from a licensing model to a subscription model. These transitions typically lead to near term growth headwinds but longerterm profitability improvement and stickier customers. FICO’s scores revenue continues to grow at a double-digit annual rate, and margins (Gross, Operating, and Net Income) are expanding which supports the premise that the company is maintaining their pricing power. We view this decline as a buying opportunity. Management seems to agree with our thinking as they announced a $500M stock repurchase program on August 18th."

Based on our calculations, Fair Isaac Corporation (NYSE: FICO) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. FICO was in 28 hedge fund portfolios at the end of the first half of 2021, compared to 27 funds in the previous quarter. Fair Isaac Corporation (NYSE: FICO) delivered a -21.54% 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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