In this article, we present the list of 10 Value Arbitrage Stocks Sabrepoint Capital is Buying.
George Baxter’s Sabrepoint Capital is a Dallas, Texas-based hedge fund that believes alpha generation to be a zero-sum game in which you must have a competitive advantage over other investors to be successful. Sabrepoint believes those advantages can come in one of three forms: informational, structural, and analytical.
The main investment strategy employed by the fund is value arbitrage, into which 30%-115% of its gross exposure will be devoted at any one time. Each of the fund’s value arbitrage targets must trade for at least 30% beneath its intrinsic value and have a forthcoming catalyst within the next 9-18 months that could allow it to close that gap. In its quest to gain an informational and analytical edge over other investors, the fund also focuses its investments on lesser-known companies for which limited public information and analysis is available.
Sabrepoint Capital has been very successful at employing its strategies and outperforming many of its rivals to this point. From its inception in August 2016 through March 2020, Sabrepoint Capital Partners, LP generated a strong compound annual return of 12.48%. The fund delivered positive returns in each of its first four years on the market, including a stellar 2017 with gains of 19.91%. Sabrepoint Capital has over $476 million in assets under management as of March 2021.
During the third quarter of last year, Sabrepoint Capital made several big purchases among its favorite stock picks, with the value of its 13F portfolio growing to over $376 million from just over $317 million in the middle of 2021. Unsurprisingly given its investment strategy, many of those stock picks are lesser-known in the investing community.
In this article, we’ll delve into ten stocks the fund has been buying in anticipation of prominent gains over the coming months.
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We follow hedge funds like Sabrepoint Capital because Insider Monkey’s research has uncovered that their consensus stock picks can deliver outstanding returns.
Now then, let’s check out the 10 value arbitrage Stocks Sabrepoint Capital is buying. Note that all hedge fund data is based on the exclusive group of 800+ funds tracked by Insider Monkey as part of our market-beating investment strategy.
10 Value Arbitrage Stocks Sabrepoint Capital is Buying
10. Turning Point Brands, Inc. (NYSE:TPB)
Our list is kicked off by Turning Point Brands, Inc. (NYSE:TPB), which grew tremendously in hedge fund popularity during the third quarter of 2020, as ownership of the stock doubled among the hedge funds tracked by Insider Monkey’s database. Sabrepoint Capital has been a shareholder dating back to late 2017 and added another 55,200 Turning Point Brands, Inc. (NYSE:TPB) shares to its 13F portfolio during the September 2021 quarter.
A maker of smokeless tobacco, rolling papers, and various vaping products, Turning Point Brands, Inc. (NYSE:TPB) shares struggled in 2021, sliding by 15%. In its Q3 2021 investor letter, Maran Capital Management said investors appear to be overly focused on TPB’s weakest division New Gen, which is struggling to break even while downplaying the success and growth potential of its other two divisions, which are run-rating close to $100 million a year in EBITDA.
9. Live Nation Entertainment, Inc. (NYSE:LYV)
Next up is Live Nation Entertainment, Inc. (NYSE:LYV), a new addition to Sabrepoint Capital’s 13F portfolio during Q3 after the fund bought 150,000 LYV shares, giving it a stake valued at $14.81 million at the end of September. There was a big dip in hedge fund ownership of Live Nation Entertainment, Inc. (NYSE:LYV) during the first half of 2021 as the stock soared in value, with multiple hedge funds closing out their profitable positions.
Live Nation Entertainment, Inc. (NYSE:LYV) shares have close to doubled in value between the middle of 2020 and the third quarter of 2021, but Sabrepoint Capital clearly believes that further gains are in store over the coming 12-18 months. The promoter of concerts and other live events was hit by tragedy in November when ten people were killed during a crowd surge at one of its music festivals. Live Nation Entertainment, Inc. (NYSE:LYV) is currently being investigated by the House Oversight and Reform Committee for any potential negligence that may have contributed to the unfortunate incident.
8. Fiserv, Inc. (NASDAQ:FISV)
Sabrepoint Capital added 46,520 shares of Fiserv, Inc. (NASDAQ:FISV) to its 13F portfolio during Q3, lifting its stake in the financial technology and services company to 151,520 shares. 66 hedge funds were long Fiserv, Inc. (NASDAQ:FISV) at the end of Q3, a nearly 30% decline from the end of 2020 after three straight quarters of falling hedge fund ownership of the stock.
After researching several new stock ideas during the first quarter of 2021, Madison Funds invested in just one of those names, Fiserv, Inc. (NASDAQ:FISV). In its investor letter for the same quarter, the fund noted how important and “sticky” Fiserv, Inc. (NASDAQ:FISV)’s technology is to financial institutions and credit companies, making its revenue and sales extremely resilient regardless of economic conditions. The fund is also bullish on Fiserv, Inc. (NASDAQ:FISV)’s Clover and Carat business acquisition platforms, believing that they can extend their above-market growth rates well into the future.
Cooper Investors, an investment management firm, published its “Cooper Investors Global Equities Fund (Hedged)” fourth quarter 2021 investor letter and mentioned Fiserv, Inc. (NASDAQ:FISV). Here is what the fund said:
“Finally, the portfolio also sold its position in Fiserv as competition in the financial technology space is only increasing and becoming more intense. We deployed the capital elsewhere in more attractive investment propositions.”
7. 1Life Healthcare, Inc. (NASDAQ:ONEM)
Sabrepoint Capital nearly quadrupled the size of its 1Life Healthcare, Inc. (NASDAQ:ONEM) position during Q3, buying 633,500 shares to give it an even 850,000 ONEM shares worth just over $17 million at the end of September. Hedge fund ownership of the primary care provider has increased for six consecutive quarters since the company’s IPO in the first quarter of 2020, nearly tripling during that time.
1Life Healthcare, Inc. (NASDAQ:ONEM)’s acquisition of Iora Health, which closed at the beginning of September, doesn’t appear to have deterred hedge funds at all despite the move generally being panned by other analysts and investors. While investors with a shorter focus appear to dislike the added risk and hit to near-term profitability that will result from the deal, hedge funds and other investors with a longer-term focus appear to like the strategic viability and growth potential of the acquisition, not to mention the discounted price to build up their 1Life Healthcare, Inc. (NASDAQ:ONEM) positions.
Nomadic Value Partners released its Q2 2021 investor letter and mentioned 1Life Healthcare, Inc. (NASDAQ:ONEM). Here‘s what the fund said:
“On June 7th One Medical (ONEM) announced an acquisition of Iora Health, a Medicare Advantage primary care business (MA PCP), for $2.1 billion of ONEM stock. The price implies a forward EV/sales valuation of 7x, a meaningful discount to comparables, Oak Street Health (OSH, portfolio holding) and Agilon Health (AGL), who had forward EV/sales multiples at time of announcement of 9x and 8.7x, respectively. However, after analyzing the provided information in combination with some additional industry scuttlebutt, I decided to sell our small position in the stock on June 18th. If you regularly read these quarterly letters, you are probably wondering why I would pass on this deal. In short, there are three reasons:
First, Iora Health is not as good of a business as the category leader, Oak Street Health (OSH, current portfolio holding), which causes me to wonder if 1Life Healthcare, Inc. (NASDAQ:ONEM) is buying a turnaround5. Second, the deal comes with significant integration risks, both tech and cultural, and the synergies presented by management are suspect6. Third, and probably the most important, is lost time as ONEM figures out these two issues over the next 2-3 years. Category leaders are focused on patient acquisition since they have already proven attractive unit economics at some initial scale. ONEM turning inward to plug holes instead of going all-in on patient acquisition could significantly stunt the base on which revenues can compound over the next few years.”
6. Spotify Technology S.A. (NYSE:SPOT)
Music streaming giant Spotify Technology S.A. (NYSE:SPOT) closes out the first half of our list of compelling value arbitrage stocks that Sabrepoint Capital is buying. The fund bought another 20,000 Spotify Technology S.A. (NYSE:SPOT) shares during the third quarter, giving it an even 75,000 total, a position worth $17.2 million on September 30. Hedge fund ownership of Spotify Technology S.A. (NYSE:SPOT) has been remarkably stable over the last three years since a greater than 30% decline in Q4 of 2018.
Spotify Technology S.A. (NYSE:SPOT) shares have struggled heavily over the past year, losing over 30% of their value as engagement began declining following the release of pandemic restrictions. Nonetheless, Baron Funds remains bullish on the long-term potential of Spotify, predicting in its Q3 2021 investor letter that the company could grow subscriptions to 250 million over the next few years.
Guardian Fund, an investment management firm, published its fourth-quarter 2021 investor letter and mentioned Spotify Technology S.A. (NYSE:SPOT). Here‘s what the fund said:
“One of the most important things is to recognize when a business reaches an inflection point, which is when operational leverage starts to kick in and the growth in profitability catches up with revenue growth. The inflection point is often the big promise, and a lot of our effort is spent trying to understand if scale is likely to translate into significant profitability.
For example, regarding Spotify Technology S.A. (NYSE:SPOT), we believe margins should inflect sooner than later because Spotify’s total monthly active user base continues to grow from about 390 million, which combined with more engagement and better machine learning drives significant ad-supported revenues (USD 323 million in 2021 Q3, small yet growing 75%). It’s also worth noting that because Spotify’s growth is only around the 20-30% range, the valuation is dramatically lower than that of for example Snowflake. The lower price provides a substantial margin of safety because it gives an asymmetric return profile.”
5. Upwork Inc. (NASDAQ:UPWK)
The second half of our list of Sabrepoint Capital’s latest value arbitrage buys is freelance work platform Upwork Inc. (NASDAQ:UPWK). George Baxter’s fund bought another 60,000 UPWK shares during the third quarter, giving it a position of 420,000 total shares valued at $20.17 million on September 30. Hedge fund ownership of Upwork hit a new high of 35 at the end of Q3, more than triple the number of shareholders compared to the middle of 2019.
With hundreds of thousands of active clients, Upwork Inc. (NASDAQ:UPWK) has benefited tremendously from the global push towards remote work that has been accelerated by the pandemic. Hedge funds appear to be bullish on Upwork’s potential to capture a larger slice of the large enterprise pie, which currently accounts for just 20% of the gross volume of work serviced on the platform. Upwork grew revenue by 32% year-over-year during Q3, hitting $128 million in sales.
4. SEMrush Holdings, Inc. (NYSE:SEMR)
Sabrepoint Capital bought 88,954 shares of SEMrush Holdings, Inc. (NYSE:SEMR) during the September quarter, adding onto the large position in the company it opened a quarter earlier. The fund had an 8.24% ownership stake in SEMR as of September 30, owning 889,698 shares. 19 hedge funds were long SEMR at the end of Q1 following the software provider’s IPO, but that figure crashed to just 7 a quarter later and stood at 10 at the end of September.
SEMrush Holdings, Inc. (NYSE:SEMR) grew revenue by 35.6% year-over-year in 2020, hitting $124.9 million, while growing its customers by just under 25% to 67,000. Perhaps most impressive is the company’s ability to have grown to its current heights through raising just $37 million, highlighting the efficiency of both the company’s offerings (with gross margin coming in at 76% during 2020) and its management team.
ClearBridge Investments, an investment management firm, published its “Small Cap Growth Strategy” first quarter 2021 investor letter and mentioned SEMrush Holdings, Inc. (NYSE:SEMR). Here‘s what the fund said:
“We established seven new positions during the quarter, (including SEMrush) largely financed through trims in existing holdings whose market values have risen. Four of the additions play roles in the accelerating digital transformation of the sales, marketing and customer development processes. SEMrush, in the IT sector, is a software provider that help clients optimize their marketing spend across digital search and social media platforms.”
3. Walker & Dunlop Inc. (NYSE:WD)
Sabrepoint Capital made a small 5,000-share addition to its Walker & Dunlop Inc. (NYSE:WD) holding during Q3, giving it an even 200,000 WD shares on September 30. The fund was one of 16 long WD at that time, down from 25 at the end of 2019.
Walker & Dunlop Inc. (NYSE:WD), which provides financial services to the real estate industry, is one of the largest lenders to the commercial real estate market in the U.S, having grown its total lending volume to $24.7 billion as of 2020, representing a 25% annual increase over the previous decade. Walker & Dunlop hit EPS of $2.21 during the third quarter, growing net income by 35% year-over-year, and could grow earnings by greater than 50% annually over the next decade as CRE maturities are set to triple during that time.
2. Clearwater Paper Corporation (NYSE:CLW)
One of Sabrepoint Capital’s biggest buys of Q3 was in Clearwater Paper Corp (NYSE:CLW), as it bought another 263,900 shares to give it 735,000 total, a position valued at $28.14 million on September 30 and giving the fund 7.47% exposure to the stock in its 13F portfolio. Hedge fund ownership of CLW has rebounded slightly after bottoming out during the first quarter of 2020, though more hedge funds did sell off their CLW positions in Q2 than in any quarter since 2014.
One of the Top 22 Packaging Companies in USA, Clearwater Paper Corp (NYSE:CLW) shares took a hit following the December acquisition of Verso by BillerudKorsnas AB, which intends to convert several Verso machines to packaging board, adding a new level of risk to Clearwater’s story, as the company is one of the largest boxboard producers. It pulled in $450.5 million in revenue and 0.55 in EPS during Q3, both of which comfortably topped estimates.
1. Eventbrite, Inc. (NYSE:EB)
Topping our list of Sabrepoint Capital’s top value arbitrage buys is the fund’s top stock pick Eventbrite, Inc. (NYSE:EB), which it bought another 150,000 shares of during Q3. George Baxter’s firm now owns 1.4 million EB shares valued at $28.34 million at the end of September. While Sabrepoint continues to be bullish, other hedge funds grew cautious, as just two funds initiated new positions in EB during the September quarter, the lowest total since late-2018.
Sabrepoint Capital is clearly bullish on the live events market rebounding from its pandemic swoon, having bought into both Eventbrite, Inc. (NYSE:EB) and Live Nation during Q3 of 2020. By far the largest small-to-mid market event coordinator in the United States, hedge funds believe Eventbrite will benefit from an Australian-type rebound in the live events market and that the experience economy will continue to grow at close to double-digit rates in the years to come. Hedge funds are also hopeful that the cost cuts implemented by Eventbrite during the pandemic will persist going forward, making the company a much more profitable one.
Artisan Partners, a high value-added investment management firm, published its ‘Artisan Small Cap Fund’ second quarter 2021 investor letter and mentioned Eventbrite, Inc. (NYSE:EB). Here‘s what the fund said:
“Eventbrite is the largest software and ticketing platform helping event creators plan, promote and produce live events in small-and-mid markets. The company generates revenue by charging a per-ticket fee on paid tickets and has a strong foothold in the small-and-mid markets—nearly 20X the size of the next largest competitor. We believe Eventbrite is well-positioned to benefit from a sharp increase in demand for live events amid the broader re-opening of the US economy—a dynamic it has already witnessed in Australia with live events bouncing back to approximately 90% of 2019 levels. We expect this to be amplified by significant cost cuts made during the pandemic (>30% of 2019 revenue) remaining in place. Longer term, we believe Eventbrite should benefit from the secular trend toward consumer experiences, an industry growing over 8% per year prior to the pandemic.”
You can also take a peek at 10 Tech Stocks to Buy According to Select Equity Group and Top 10 Stock Picks of Thomas Bancroft’s Makaira Partners.
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Disclosure: None. 10 Value Arbitrage Stocks Sabrepoint Capital is Buying is originally published at Insider Monkey.
