Madison Small Cap Fund Sells OneSpaWorld on Valuation

Madison Small Cap Fund liquidated its entire position in OneSpaWorld Holdings during the second quarter after determining the cruise wellness operator had reached its intrinsic value.

"We have closed out our investment in consumer discretionary company OneSpaWorld Holdings Limited (NASDAQ:OSW), as we believe the stock has reached our intrinsic value estimate and the risk/reward is no longer favorable," the fund stated. The firm initiated its position in 2020 and described the trade as a solid investment.

The exit occurred despite solid underlying fundamentals at OneSpaWorld, which operates health and wellness centers onboard cruise ships and at destination resorts. The company reported a 13% increase in first-quarter revenue, reaching $247.6 million. Over the past 52 weeks, the stock has gained nearly 23%, though it recently pulled back by 4% over the last month. Shares closed at $26.63 on July 16, giving the company a $2.7 billion market capitalization.

Madison's decision reflects a broader cooling of institutional interest. The number of hedge funds holding OneSpaWorld dropped to 15 in the first quarter, down from 20 in the previous quarter, indicating that other major players are also taking profits.

Small-cap rally leaves fund lagging

The sale highlights a highly selective environment within a broadly surging small-cap market. The Russell 2000 Index jumped 21.5% in the second quarter, while the Russell 2500 gained 20.2%. This exceptional strength was largely driven by anticipated peace in the Middle East, which propelled information technology, health care, and industrial sectors.

Despite this favorable backdrop, Madison Small Cap Fund returned just 12.7% in the quarter, significantly underperforming its benchmarks. The firm attributed this lag to recent investments in underperforming software companies, which offset strong gains in other information technology holdings.

However, the firm's management remains broadly optimistic about the asset class. Executives noted that small caps have recently outperformed large caps. They also pointed to an anticipated recovery in certain software sectors and tangible improvements in housing stocks toward the end of the second quarter as reasons for continued confidence.

For market participants, the OneSpaWorld exit serves as a tactical signal. It suggests that after a strong 52-week run, certain high-flying consumer discretionary names are now being priced for perfection, prompting active managers to rotate capital into areas they view as having longer runways.