Leon Cooperman and his hedge fund, Omega Advisors, manage an equity portfolio worth more than $6 billion. In a new 13G filing reported earlier this month, Cooperman revealed that he owns 6.9% of dELiA*s, Inc. (NASDAQ:DLIA), the young women’s apparel company. Due to the fact that it’s important to track hedge fund sentiment (discover how we returned 47.6% in our first year), we’ll attempt to answer the question everybody wants to know: why did Cooperman disclose such a massive stake in Delia’s?
1) Low market capitalization
In our view, it all starts with the market cap; Delia’s currently trades at a minute market capitalization just over $73 million. According to multiple empirical studies, small-cap stocks offer hedge funds the best opportunity to outperform the market because: (1) they’re tracked by fewer analysts, (2) it’s easier to obtain a so-called ‘research advantage’ in these stocks, because there’s less public information available and (3) they often appreciate more rapidly than their large-cap peers once the market learns of a hedge fund’s involvement.
In the case of Delia’s, Cooperman’s disclosure led to a 12.8% gain on Tuesday, November 5th, when the filing was reported, and a 5.3% gain the following day. In other words, shares of Delia’s were up 13% year-to-date through November 4th. After the markets closed on November 6th, they were up a whopping 35% YTD.
Of course, it’s important to remember that the date of Cooperman’s filing wasn’t actually when he took the position in Delia’s. According to SEC records, the actual stake was bought on October 24th. Essentially, this means that due to the fact that Leon Cooperman is, well, Leon Cooperman, and his name alone carries so much weight in the investing world, he’s been able to book a gain of more than 30% on his position in just ten trading days. The sheer momentum his disclosure created generated most of this appreciation.
2) The Alloy sale
So there’s that, and there’s also this: Delia’s sold its Alloy subsidiary to HRSH Acquisitions earlier this year for $3.7 million in cash and $3.1 million in debt. In a press release, the company’s old CEO (we’ll get to that in a moment), Walter Killough, said the transaction “will enable [Delia’s] to focus [its] efforts exclusively on its dELiA*s brand,” adding that it will work to improve its existing cost structure as well.
3) The presence of a “hedgie” friend
As it currently stands, Delia’s focus is on girls and young women between the ages of 13 to 19 “with a more wholesome image” as fellow hedge fund manager Whitney Tilson likes to say. Tilson, who was the largest shareholder in Delia’s of the funds we track at the end of the second quarter, told the Deal earlier this year that the stock has been a “classic value trap” in the past, adding that the company hasn’t had “the right products” to fall in line with its sensible image.
Tilson believes that even though Delia’s target market is more conventional than girls that shop at risqué competitors like Wet Seal, the company sells many of the same clothes that are sold at peers’ stores. This idea ties into our next point.
4) A new CEO
In May, Delia’s brought in Tracy Gardner to serve as its new CEO, replacing Walter Killough. Before joining Delia’s, Gardner served as a board member at Women in Need, Inc. and Bonobos, a Creative Advisor at Gap, the Chief Strategy Officer at StyleOwner, and she was President of the J. Crew brand at J. Crew Group.
Most bullish analysts point to the latter experience in particular, when she oversaw J. Crew’s flagship brand during a period of sustained success between 2004 and 2010. At Delia’s, it’s likely that investors like Cooperman and Tilson are expecting her to give that same focus to the company’s main brand.
In short, it’s evident that Leon Cooperman is probably long Delia’s for a few different reasons. The stock’s small market cap gave him the ability to generate a short-term gain upon the SEC disclosure, and over the longer run, Delia’s new CEO is expected to differentiate itself from competitors while taking advantage of the newly found freedom provided by the Alloy sale.
At a mere 0.25 times sales and 1.5 times book, there’s no denying shares are cheap at the moment, even after the recent appreciation. If Delia’s can hit or exceed Wall Street’s earnings forecast over the next five years, in which it expects annual EPS growth of 14%, there’s potential for more gains.