After starting the year on a good note, the stock picks of Daniel Lewis‘ Orange Capital appear to have faltered heading into the midway point. Orange Capital, a New York-based, event-driven hedge fund, was founded by Lewis and Russell Hoffman in 2005. The fund’s picks posted a strong gain of 10.5% for the first quarter of the year. However, more than half of those gains were washed away by the 5.7% loss the fund’s picks incurred in the second quarter, bringing their year-to-date returns down to 4.2%. The second quarter returns have been calculated on the basis of the weighted average returns of the eight stocks with a market cap of over a billion dollars that Orange Capital was long in at the end of March. Moreover, we have also excluded returns from short positions, bonds, and options in our calculations, hence it is quite possible that the actual returns of the fund during the quarter are significantly different from our estimates. In this article we are going to focus on three of the prominent losers in Orange Capital’s equity portfolio that contributed majorly to the fund’s picks losing 5.7% in the second quarter. They are American Capital Ltd. (NASDAQ:ACAS), H & R Block Inc (NYSE:HRB), and NorthStar Asset Management Group Inc (NYSE:NSAM).
Before we proceed to analyze Orange Capital’s top losers for the quarter, it’s also important to deduce why most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 80 percentage points since the end of August 2012. These stocks returned a cumulative of 139.7% vs. 58.7% gain for the S&P 500 Index (see the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).
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Shares of Orange Capital’s second-largest holding, American Capital Ltd. (NASDAQ:ACAS) plummeted by more that 8% during the second quarter. The majority of that decline came after the BDC (business development company) declared its first quarter results for fiscal year 2015 on May 7. As of March 31, Orange Capital held over 6.37 million shares of the company valued at close to $106 million. Currently, shares of American Capital Ltd. (NASDAQ:ACAS) trade close to a 30% discount to book value, which is one of the largest discounts in the overall BDC industry. Most of the experts attribute that to the company not paying its dividends, and its high expense ratios. Four of the eight leading analysts that cover the stock have a ‘Buy’ rating on it, while the other four have a ‘Hold’ rating. Among the hedge funds we cover, Brian Taylor‘s Pine River Capital Management was the largest shareholder of American Capital Ltd. (NASDAQ:ACAS) at the end of March, followed by Fir Tree.
H & R Block Inc (NYSE:HRB), which was Orange Capital’s largest equity holding at the end of 2014, was reduced to the third-largest at the end of first quarter of this year, owing both to the decline in its stock price as well as Orange Capital trimming its holding by 7% to slightly over 2.8 million shares. Orange Capital’s stake in H & R Block Inc (NYSE:HRB) was worth $90.16 million as of March 31. After being range-bound throughout April and May, shares of H & R Block Inc (NYSE:HRB) moved lower in June, ending the quarter down by 7.5%. Similar to American Capital Ltd. (NASDAQ:ACAS) , the decline in H & R Block Inc (NYSE:HRB)’s shares was again led by the company declaring disappointing results, on June 8. While Wall Street was expecting the company to declare EPS of $2.03 on revenue of $3.21 billion for its fiscal full-year 2015, the company reported EPS of $1.75 on revenue of $3.08 billion. David E. Shaw‘s firm D.E. Shaw reduced its position in the company by 34% to 1.72 million shares during the January-March period.
NorthStar Asset Management Group Inc (NYSE:NSAM) was one of the biggest losers in Orange Capital’s equity portfolio during the second quarter, with shares of the company slumping by over 20% during that period. Although Orange Capital sold off 30% of its stake in NorthStar Asset Management Group Inc (NYSE:NSAM) during the January-March period, it still held slightly over 3 million shares of the company worth $70.2 million as of March 31. For the first quarter of this year, NorthStar Asset Management Group Inc (NYSE:NSAM) reported EPS of $0.20, 20% below analysts’ estimates of $0.25. All four prominent brokerages and analysts that cover the stock have a ‘Buy’ rating on it, with a consensus price target of $27.63, almost 55% above its current trading price. Robert Pitts‘ Steadfast Capital Management increased its stake in NorthStar Asset Management Group Inc (NYSE:NSAM) by 1% to over 14.4 million shares during the January-March period.
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