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Prescott Group is Betting Big on These Micro-Cap Stocks for Q2

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Oklahoma-based Prescott Group Capital Management recently disclosed its U.S equity portfolio as of the end of March via a 13F filing submitted with the Securities and Exchange Commission. The long/short equity hedge fund was founded by Phil Frohlich in 1992 and currently manages over $650 million in assets. According to the fund’s latest filing, its U.S equity portfolio was valued at $420.18 million at the end of March, a marginal decline from the $435.92 million that it was worth at the end of 2015. Though the fund manages a fairly diversified portfolio, its top-ten holdings accounted for over 40% of the value of its portfolio at the end of March. Since Prescott Group Capital Management is known for primarily investing in small and micro-cap companies, it’s not a surprise that all five of its largest equity holdings were micro-cap stocks as of March 31. In this article, we will go through those five holdings and try to gauge why the fund bullish on these unheralded equities and whether other investors should be as well.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Enova International Inc (NYSE:ENVA)

 – Shares Held by Prescott Group Capital Management (as of March 31): 1.91 million

 – Value of Holding (as of March 31): $12.05 million

Technology and analytics company Enova International Inc (NYSE:ENVA) jumped to the fifth spot in Prescott Group Capital Management’s portfolio by the end of the first quarter, owing to a 33% increase to the fund’s stake in the company during the quarter. Enova International Inc (NYSE:ENVA) became a separate publicly-traded company in November 2014 after its spin-off from Cash America International Inc (NYSE:CSH) was completed. Since its IPO, shares of the company have declined considerably despite a 32.28% rise this year, as they are still trading down by over 70% from their IPO price of $30 per share. A large part of the gains the stock has seen this year came on April 29, a day after the company reported its first quarter financial results. While analysts had anticipated the company reporting EPS of $0.21 on revenue of $165.28 million for the quarter, Enova International managed to soundly beat expectations by declaring EPS of $0.31 on revenue of $174.65 million. Following the earnings release, analysts at FBR & Co. reiterated their ‘Market Perform’ rating on the stock, but upped their price target on it to $8.50 from $6.50. Chuck Royce‘s Royce & Associates increased its stake in Enova International by 20% to 1.07 million shares during the fourth quarter.

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#4 PharmAthene, Inc. (NYSEMKT:PIP)

 – Shares Held by Prescott Group Capital Management (as of March 31): 7.98 million

 – Value of Holding (as of March 31): $15.08 million

PharmAthene, Inc. (NYSEMKT:PIP) continued to remain Prescott Group Capital Management’s fourth-largest equity holding, with the fund making no change to its stake in the company during the first quarter. PharmAthene scored a major victory in December after the Delaware Supreme Court affirmed the Delaware Court of Chancery’s Judgment against SIGA Technologies, which provides an estimated total award of approximately $205 million plus interest to PharmAthene, Inc. (NYSEMKT:PIP). Though shares of  PharmAthene spiked in December after the decision, they gave up all of those gains over the next two months as investors feared that SIGA Technologies, which was under bankruptcy protection at that time, would be unable to pay the awarded damages to the former. However, shares did start rallying again in late-March after it became clear that SIGA Technologies will emerge from bankruptcy. On April 10, SIGA Technologies did indeed emerge from bankruptcy and paid an initial nonrefundable $5 million payment to PharmAthene. Alongside its fourth quarter results on March 11, PharmAthene revealed that it intends to distribute at least 90% of the after-tax proceeds of the $205 million award to shareholders. Sander Gerber‘s Hudson Bay Capital Management reduced its stake in PharmAthene by 24% to 2.34 million shares during the fourth quarter.

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We dig into Prescott Group’s top three holdings on the next page.

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