Outerwall Inc (OUTR) is Hugely Popular Among Hedge Funds

Beating the market can be difficult when picking stocks on your own. One common source of alpha can be focusing on small cap stocks, which tend to outperform its larger peers over time. Another source of alpha can be following the smart money, by mimicking the trades of professional investors. Our research has shown that, by combining these two approaches – buying the most popular small-cap stocks recently purchased by hedge funds – one can outperform the market on average (read the details here).

A slew of “hedgies” accumulated shares of Outerwall Inc (NASDAQ:OUTR) during the fourth quarter of 2013, among whom the largest purchasers were Barry Rosenstein of Jana Partners (its largest shareholder with a 13.5% stake), Dinakar Singh of TPG-AXON Management and Alec Litowitz of Magnetar Capital (whose purchase was a new position initiation). Joshua Nash, Clint Murray, and Kenneth Squire are also among Outerwall shareholders.

Outerwall Inc (NASDAQ:OUTR)

Outerwall Inc (NASDAQ:OUTR) is an $1.8 billion market capitalization company that operates 43,700 Redbox kiosks for DVD rentals, 20,300 Coinstar kiosks for coin-counting and other self-service concepts in the automated retail space (such as recycling machines for electronics). Essentially, the company is using the cash flow from its mature Redbox and Coinstar businesses to fund investments in new ventures (such as its purchase of ecoATM, a producer of kiosks for recycling and trading-in electronics, in July 2013), opportunistic acquisitions and share repurchases.

Jana Partners began to purchase the shares in the third quarter of 2013, probably after the stock dropped 17% in mid-September due to lowered guidance for 2013 amid disappointing results in its Redbox business. In early October, the hedge fund disclosed a 13.5% stake and stated it would press the board to review strategic options, including a sale of the entire company, divestitures of certain businesses, management changes and changes to its capital structure. The campaign worked, as three weeks later, along with an in-line earnings release for the third quarter of 2013, Outerwall Inc (NASDAQ:OUTR) announced it would return 75-100% of its free cash flow to shareholders, including $100 million in the fourth quarter of 2013 and $50 million early in the first quarter of 2014. For reference, management expects to generate $200-240 million of free cash flow in 2014, implying $150-240 million of share repurchases (or 8-13% of its market capitalization) for the year. At this pace, Outerwall’s outstanding share count would be roughly 30% lower in three years. According to media reports, Jana believes this is a positive first step but will continue to explore a strategic review of the company.

The stock rallied 45% from its mid-September low through the end of 2013 and has risen a further 5% in 2014 so far after reporting better-than-expected results for the fourth quarter of 2013. Despite the rally, its valuation is not too demanding, trading at forward P/E and EV/EBITDA multiples of 4.5X and 12.2X, respectively, while its free cash flow yield is an attractive 7.6%. With high profit margins, a manageable debt load (especially after extending its debt maturities) and approximately $15 per share in cash, Outerwall Inc (NASDAQ:OUTR) should continue to work as long as it sticks to its plan of investing in new ventures in a disciplined manner while returning any excess cash to shareholders. An initiation of a dividend would not be out of the question, in our view. Finally, any further developments by Jana on its push for strategic options would be greeted positively by the market.

Disclosure: none

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!