Hedge funds’ quarterly 13F filings are quite useful for retail investors seeking to invest like wealthy and successful money managers, but their quarterly letters to investors are even more informative and useful. Raging Capital Management LLC, an investment firm launched by William C. Martin in April 2006 with capital from friends and family, recently sent a quarterly letter to investors discussing the firm’s performance and its biggest contributors to that performance.
New Jersey-based Raging Capital Management, mostly known for its activist investment strategy, invests in both emerging growth stocks and deep-value investments. The activist asset manager generated a net-of-fees return of 5.1% in the second quarter of 2016, bringing tits return for the first half of the year to an impressive 14.0%. Mr. Martin’s investment firm delivered a compound annual growth rate of 21.2% since inception through the end of the second quarter, approximately three-times the 7.1% return generated by the S&P 500 Index over the same time span.
“Current policies are failing to jumpstart growth, yet they are serving to sustain and inflate asset valuations. This is leading to an odd and difficult juxtaposition for investors,” Raging Capital said in its second quarter letter to investors. As Mr. Martin and his team have excelled at both long- and short-side investing, the following article will discuss one of the asset manager’s new long positions, as well as three of the firm’s shorts, as revealed in the aforementioned letter.
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Raging Capital Management Likes Cavium Inc. (NASDAQ:CAVM)
Cavium Inc. (NASDAQ:CAVM) is a provider of semiconductor processors which Raging Capital believes is “trading (at) a bargain valuation.” The semiconductor maker has lost 25% of its market value since the beginning of 2016, as “investors have punished CAVM due to short-term worries about the exact timing of the ramp up of its latest network processor and the slow initial uptake of the ARM-server market.” Furthermore, Mr. Martin and his team reckon that the network processor business offers “a solid foundation of value”, while Cavium’s products in the pipeline provide opportunities for “home-run upside potential.”
In mid-July, Cavium agreed to acquire storage connectivity chip maker QLogic Corporation (NASDAQ:QLGC) in a cash-and-stock deal valued at approximately $1.36 billion. Wall Street analysts were struggling to see the strategic rationale behind the deal, viewing the acquisition as growth and margin dilutive. Under the terms of the agreement, QLogic shareholders are set to receive $11.00 in cash and 0.098 shares of Cavium per QLogic share. QLogic is known for its Fibre Channel (FC) adapters used in cloud-storage technology. Ken Fisher’s Fisher Asset Management acquired a new stake of 98,928 shares of Cavium Inc. (NASDAQ:CAVM) during the June quarter.
Activist Raging Capital Shorts Valeant Pharmaceuticals Intl Inc. (NYSE:VRX)
Raging Capital’s set of long positions does not seem to be as captivating as the firm’s short plays. The activist asset manager’s short book was up by an exciting 14.3% in the first half of 2016, contributing approximately 10.80% of the fund’s overall returns for the period. Raging Capital Management’s short position in Valeant Pharmaceuticals Intl Inc. (NYSE:VRX), established in May at an undisclosed price, added roughly 2.20% of returns attribution to the fund’s performance in the first half of the year. While some investors and analysts believe the embattled Canadian drugmaker may have left its worst days behind it, Mr. Martin and his team believe Valeant will have a hard time cutting down its $30-billion-plus debt load, so “bankruptcy could ultimately become a more likely outcome.”
Fresh media reports say that the once-hedge fund darling may be able to sell its constipation treatment Relistor for $400 million-to-$500 million, with multiple companies being interested in acquiring the drug. Mr. Martin explains some of the reasoning behind his short position in Valeant, saying that “VRX’s bad balance sheet is compounded by the risks associated with past price-gouging misdeeds as well as the fact that (nearly) $1 billion of high-margin revenues are at risk from generic competition in the coming year.” The Canadian drugmaker has seen the value of its stock plummet by 78% since the start of 2016. Emmanuel Ferreira’s Convector Capital owns 192,000 shares of Valeant Pharmaceuticals Intl Inc. (NYSE:VRX as of the end of the second quarter.
The second page of this article will lay out Raging Capital’s thoughts on two other prominent short positions.