It is common knowledge that high net-worth individuals have been channeling more capital into activist hedge funds over the past several years. According to Hedge Fund Research, the shareholder activist arena had nearly $128 billion in assets under management in the first half of 2015, compared to a mere $23 billion back in 2002. Activist hedge funds have generated eye-catching returns over the past several years, which likely explains the fast-increasing popularity of this type of investment strategy. Statistics reveal that activist investment strategies returned 8.5% in 2014, 19.2% in 2013, and 9.3% in 2012. Presumably, activist hedge funds did not perform as strongly in 2015 as they did during the previous three years. Nonetheless, this investment strategy is worth monitoring and analyzing, as it may be possible to generate attractive returns for individual investors solely by mimicking activists’ moves. For this reason, this article discusses three 13D (activist) filings submitted by several hedge funds tracked by Insider Monkey.
We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see more details here).
According to a freshly-amended 13D filing, Joshua Silverman’s Iroquois Capital Management LLC currently owns 1.85 million shares of LRAD Corp (NASDAQ:LRAD), which account for 5.7% of the company’s outstanding common stock. This compares to the 1.88 million-share position disclosed through the fund’s latest 13D filing on the company, which was submitted with the SEC in June of 2015. Most importantly, Iroquois sent a letter to LRAD on January 14, nominating two director candidates, Scott L. Anchin and Daniel H. McCollum, for election to the company’s Board at the upcoming 2016 annual meeting of shareholders. Furthermore, the investment management firm revealed its discontent with LRAD Corp (NASDAQ:LRAD)’s underperformance despite encountering numerous growth opportunities.
LRAD develops and markets directed acoustic products that beam, focus and control sound over short and long distances. The company reported total revenue of $16.78 million for fiscal year 2015, down by 31.7% year-over-year. Although Iroquois blames LRAD’s President and CEO Thomas R. Brown for this outcome, it appears that some factors that affected the company’s top-line growth were beyond the CEO’s control. The reduced defense spending by the U.S put some weight on the company’s revenue, while one of LRAD’s sizable orders in fiscal year 2014 (including a $4 million order for border security in the Middle East) did not recur in the following year. However, the disappointing performance of LRAD is unacceptable if considering that the mass notification market is anticipated to grow to $6.41 billion in 2018 from $2.41 billion in 2013. The shares of LRAD are down by 31% over the past year and trade at an attractive trailing price-to-earnings ratio of 6.07, which compares very favorably to the average of 21.04 for the S&P 500 companies. A mere five hedge funds had the company in their portfolios at the end of the third quarter, amassing 13.10% of its outstanding shares. Royce & Associates, founded by Chuck Royce, upped its stake in LRAD Corp (NASDAQ:LRAD) by 23% during the September quarter to 1.17 million shares.
Let’s head to the next pages of this article, where we discuss two other 13D filings, submitted by Richard McGuire of Marcato Capital Management and John Orrico of Water Island Capital.
On January 13, Marcato Capital Management ceased to be the beneficial owner of more than 5% of LPL Financial Holdings Inc. (NASDAQ:LPLA)’s shares. In a 13D filing, the investment firm reported ownership of 4.39 million shares of the independent broker-dealer, which account for 4.9% of its outstanding common stock. In mid-November, Marcato Capital filed a 13D on the company that disclosed an ownership stake of 6.05 million shares. The largest independent broker-dealer in the United States and leading independent consultant to retirement plans has seen its shares decline by 15% over the past year, thanks to a significant pullback triggered at the end of 2015. The extremely high market volatility and investor uncertainty are definitely set to impact sales-based activity for alternative investments, variable annuities, and mutual funds. Most importantly, the rising interest rate environment might hurt the demand for fixed and variable annuity products, thus, putting more weight on the company’s financial performance.
Approximately a week ago, Citigroup downgraded the stock to ‘Sell’ from ‘Neutral’, so it appears that most market participants and analysts are ignoring the company’s attractive valuation metrics and are focused on its worsening market conditions. Certain recurring revenue of LPL Financial Holdings is associated with asset balances, which fluctuate depending on market values and interest rates. Hence, the company’s asset balances (and its recurring revenue) tend to have a correlation of roughly 60% with the S&P 500 benchmark. The smart money sentiment towards the stock was negative during the third quarter, as the number of hedge funds in our system with positions in the company dropped to 18 from 23 quarter-over-quarter. John H. Scully’s SPO Advisory Corp owns 8.71 million shares of LPL Financial Holdings Inc. (NASDAQ:LPLA) as of September 30.
Follow Richard Mcguire's Marcato Capital Management
In a Schedule 13D filing, Water Island Capital reported owning 1.22 million shares of Journal Media Group Inc. (NYSE:JMG), representing 5.01% of its outstanding shares. The investment firm owned a mere 73,075 shares of the stock on September 30, as revealed by the fund’s 13F for the September quarter. On October 7, JMG announced that its Board of Directors had agreed to be acquired by Gannett Co. Inc. (NYSE:GCI) for $12.00 in cash. Nonetheless, Water Island Capital believes that JMG’s shareholders “cannot make an informed decision on the proposed sale to Gannett Co. Inc. (NYSE:GCI) without additional disclosures on the Issuer’s [Journal Media Group] real estate portfolio.”
Despite experiencing a decline in demand for its printed products and anticipating more challenges in the advertising space, Journal Media Group Inc. (NYSE:JMG)’s total revenue for the third quarter that ended September 30 increased to $110.3 million from $84.5 million reported a year earlier. A total of 13 smart money investors in our system had stakes in the company at the end of the third quarter, accumulating slightly over 20% of its outstanding shares. Dov Gertzulin’s DG Capital Management holds a 124,297-share stake in Journal Media Group Inc. (NYSE:JMG) as of the end of the third quarter.
Follow John Orrico's Water Island Capital
Disclosure: None
