Sandell Asset Management, which is led by Tom Sandell (pictured) issued a press release yesterday in connection with its campaign to elect a slate of directors to the board of Ethan Allen Interiors Inc. (NYSE:ETH). The firm believes that the company’s downturn is rooted in poor corporate governance practices, which have resulted in the accumulation of power in the hands of its CEO, Chairman and President, Farooq Kathwari. Sandell’s stake in the company amounts to 1.56 million shares, representing about 5.5% of Ethan Allen’s outstanding stock. We’ll study the latest developments in this story, as well as analyze two other recent filings in this article.
Before we dig deeper into the specifics of the above mentioned hedge fund moves let us examine why we at Insider Monkey follow hedge funds. 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 53 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. a 48.7% gain for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).
Considering that Ethan Allen Interiors Inc. (NYSE:ETH)’s stock is up by 2.3% in the last 12 months, it might seem that the company is not in dire straits. However, if we compare it to other home furnishing peers, the stock has underperformed by about 15.6% in the last year and by more than 92% in the last three-year period. According to Sandell, among the problems that the company’s outdated management has failed to see past are Ethan Allen’s failed merchandising efforts, its insignificant online presence, its trapped value to the tune of $450 million in its real estate assets, and poor corporate governance. Additionally, the average Director tenure for Ethan Allen prior to Sandell’s activism was 14.4 years. Even though the $805.15 million manufacturer and retailer of home furnishings added two new Directors to the Board recently, Sandell believes that it will ultimately have little practical significance, as it was followed by a new five-year (extendible to seven years) employment agreement for the 71-year old Farooq Kathwari. Sandell believes that the new nominees that it seeks to appoint to the Board will bring new and fresh ideas and revitalise three key areas of the company, namely retailing, finance and governance. Among the other prominent shareholders of Ethan Allen Interiors Inc. (NYSE:ETH) is Chuck Royce’s Royce & Associates, which held some 3.07 million shares of the company at the end of the second quarter.
On the next page we will look at the moves made by two other elite investors.