After Returning $400 Million to Investors, This is How Seminole Management Tweaked its Portfolio in Q1

Seminole Management Company is a New York-based hedge fund co-founded by Michael Messner and Paul Shiverick in 1995. In December 2015, the investment firm wrote in a letter to investors that it decided to return $400 million of outside investors’ money because it could not “maintain historical-like returns” in a changed trading environment without reducing the amount of capital under management. Seminole Management, known as a value-oriented investment firm, blamed the incursion of high-frequency trading and the increase of passive investing for its recent poor performance, saying that “the game has changed”. Although the firm’s decision to return 10% of its former assets under management back to outside investors does not seem to be a game-changer, the reduced pool of capital may improve the hedge fund’s capital allocation strategy quite noticeably. With that in mind, let’s have a look at Seminole’s top-5 holdings now that it’s had a full quarter under its belt since its capital reduction.

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#5. T-Mobile US Inc. (NASDAQ:TMUS)

 – Number of shares held by Seminole Management (as of March 31): 1.61 Million

 – Value of Seminole Management’s holding (as of March 31): $61.81 Million

Seminole Management Company slashed its stake in T-Mobile US Inc. (NASDAQ:TMUS) by roughly 40% during the first three months of the year, ending the first quarter with 1.61 million shares valued at $61.81 million. The reshuffled stake accounted for nearly 5.0% of Seminole’s equity holding at the end of March. The third-largest U.S wireless carrier has seen its shares gain 4% since the beginning of 2016, while its shares currently change hands at around 21.5-times expected earnings, significantly above the forward P/E multiple of 13.4 for the telecommunications services sector. Just recently, T-Mobile announced a deal with Cuban state-owned telecommunications carrier Empresa De Telecomuncaciones De Cuba that will enable T-Mobile customers to keep in touch with family and friends in Cuba at more affordable rates, as well as allow travelling customers to use their mobile phones in Cuba. First Eagle Investment Management LLC, headed by Mehdi Mahmud, acquired a stake of 2.28 million shares of T-Mobile US Inc. (NASDAQ:TMUS) during the March quarter.

On the next two pages of this article we’ll examine Seminole Management’s top-4 stock picks as of March 31.

#4. Hewlett Packard Enterprise Co (NYSE:HPE)

 – Number of shares held by Seminole Management (as of March 31): 3.65 Million

 – Value of Seminole Management’s holding (as of March 31): $64.78 Million

The New York-based hedge fund was bullish on Hewlett Packard Enterprise Co (NYSE:HPE) in the first quarter, as the asset manager lifted its HPE stake by approximately 72% during the period. In mid-April, analysts at Oppenheimer initiated coverage on Hewlett Packard Enterprise with an ‘Outperform’ rating and a price target of $21 on the stock, saying that the company could become a leading information technology provider with strong R&D capabilities and dominate the IT hardware and services segments. Oppenheimer identified HPE’s high mix of recurring revenue, which accounts for 42% of revenue, as one strong reason to be bullish on the company. HEP shares have gained 5% since the start of 2016. Richard S. Pzena’s Pzena Investment Management has 20.84 million shares of Hewlett Packard Enterprise Co (NYSE:HPE) in its equity portfolio as of March 31.

#3. Verizon Communications Inc. (NYSE:VZ)

 – Number of shares held by Seminole Management (as of March 31): 1.50 Million

 – Value of Seminole Management’s holding (as of March 31): $81.21 Million

Seminole Management decided to cut its position in Verizon Communications Inc. (NYSE:VZ) during the first quarter, by 43% to 1.50 million shares. The 1.50 million-share stake was valued at $81.21 million shares at the end of March and made up 6.5% of the hedge fund’s portfolio. At the end of April, Yahoo! Inc. (NASDAQ:YHOO) and activist firm Starboard Value LP reached an agreement to add Jeffrey Smith and three other Starboard-nominated directors to the Board, which could speed up the sale process of Yahoo!’s Web business. Verizon, which bought AOL Inc. in May 2015, is seen as the leading candidate to win Yahoo!’s auction process. Verizon has been seeking to capitalize on the market shift to digital content and advertising, and the acquisition of Yahoo’s core businesses may assist the company in controlling greater market share in the digital advertising space. Verizon shares are 10% in the green year-to-date. Robert B. Gillam’s McKinley Capital Management acquired a stake of almost 408,000 shares of Verizon Communications Inc. (NYSE:VZ) during the January-to-March period.

#2. AT&T Inc. (NYSE:T)

 – Number of shares held by Seminole Management (as of March 31): 2.10 Million

 – Value of Seminole Management’s holding (as of March 31): $82.41 Million

The New York-based asset manager cut its stake in AT&T Inc. (NYSE:T) by 47% during the March quarter, to 2.10 million shares valued at $82.41 million, with the position constituting 6.6% of Seminole’s equity portfolio on March 31. The shares of the telecommunications giant have enjoyed a great run this year and are trading near their 52-week high of $39.72. AT&T is moving on from its 15-year hosting deal with Yahoo! Inc. (NASDAQ:YHOO) after awarding a contract to host its Web and mobile portals to telecom company Synacor Inc (NASDAQ:SYNC). Various news outlets noted that the AT&T/Yahoo partnership had generated $100 million in annual revenue for embattled Yahoo! over the course of the 15-year partnership. Leighton Welch’s Welch Capital Partners owns 379,491 shares of AT&T Inc. (NYSE:T) as of March 31.

#1. Delta Air Lines Inc. (NYSE:DAL)

 – Number of shares held by Seminole Management (as of March 31): 1.70 Million

 – Value of Seminole Management’s holding (as of March 31): $82.85 Million

Delta Air Lines Inc. (NYSE:DAL) was the top equity holding in Seminole Management’s portfolio at the end of the March quarter, accounting for nearly 6.7% of its worth. The New York-based investment firm also slashed its stake in the airline during the first quarter, by 43% to 1.70 million shares. The second-largest U.S carrier may seek to reduce its capacity in the foreseeable future, as rising fuel prices and weak economies worldwide have made some routes unprofitable. The company has been struggling to reverse a negative trend of five consecutive quarters of declining passenger revenue per available seat mile (PRASM), so capacity cuts may assist Delta in solving the problem. Delta’s PRASM indicator for the March quarter dropped by 4.6% year-over-year, more than the 2.5%-to-4.5% decline previously anticipated by management. Delta anticipates passenger unit revenue for the June quarter to decline by the same 2.5%-to-4.5% that it had previously anticipated for the first quarter. Shares of the company are down by 16% since the beginning of 2016. Iridian Asset Management, founded by David Cohen and Harold Levy, holds 11.62 million shares of Delta Air Lines Inc. (NYSE:DAL) as of March 31.

Disclosure: None