David Nierenberg is both the founder of the D3 Family Funds, a family of funds managed by Nierenberg Investment Management Company, and the fund’s largest investor. Nierenberg graduated summa cum laude from Yale College before earning his law degree from Yale Law School. Prior to founding D3 Funds, he worked for seven years at Bain & Company. The D3 Family Funds focuses on micro-cap stocks with market capitalizations below $1.5 billion, giving the firm better access to upper-level management, though the firm prefers “friendly persuasion” in its discussions with management over a more aggressive “activist” approach. Additionally, micro-cap stocks are less liquid and often neglected by analysts and the financial press, allowing the fund to make timely trades on mispriced stocks. A growth-at-the-right-price investor, the fund’s website explains that an ideal value scenario would involve “a 15% grower, with extra cash on its balance sheet, bought at a forward net price-earnings ratio of only eight because the company missed a quarter or because investors disliked or misunderstood its industry.”
Below is a review of D3’s top four holdings according to the latest 13F regulatory filings, which you can view here. Each of these holdings occupies at least 10 percent of the fund’s 13F portfolio. Note that, since the fund wants exposure to management, its equity portfolio is no larger than 10 holdings total.
Here’s a surprise on the list, given the size and popularity of Hewlett-Packard Company (NYSE:HPQ). The company owns call options for 2.5 million shares at a total value of $50.8 million, or $20.30 per share. Buying call options allows D3 to leverage its capital to speculate in a Hewlett-Packard turn-around while minimizing downside risk. With hedge fund managers like Jim Chanos talking about shorting the stock, this is not a bad idea, especially if Hewlett-Packard’s upcoming product launches and ongoing organizational consolidation fail. HP’s infamously depressed shares are considered by many to be a value play—D3 clearly views their misses as temporary. The company’s market capitalization is less than half the price they were when former CEO Mark Hurd was fired in 2010.
Move Inc. (NASDAQ:MOVE) operates a network of websites relating to real estate, finance, and consumer resources for moving assistance. It operates the websites REALTORS.com, Move.com, and Moving.com. The company’s shares are trading at 20.5 times forward earnings, compared to that of its peer Zillow Inc (NASDAQ:Z) at 59.5 times forward earnings. Generally, the value of the price/earnings ratio should not be much higher than the growth rate for a company. The PEG, which is the ratio of P/E to estimated annual growth, helps us to assess “growth” companies that might appear overvalued based on P/E along, so PEG is helpful for internet stocks. A PEG closer to one is better—that means that the P/E is roughly equal to growth rate—whereas higher numbers are worse. Move Inc. has an estimated 5-year PEG of 1.26, whereas Zillow’s is 3.3. A popular name in the business, Zillow is a mega-growth play, beating analyst estimates by 500 percent for the second quarter 2012. However, Move might be interesting for investors looking to take a larger bite of the growth pie for a lower price.
Electro Scientific Industries
Electro Scientific Industries, Inc. (NASDAQ:ESIO) produces laser manufacturing solutions that are critical in the production of computer chips and other technological products. At about $13 a share, analysts see the company as having considerable upside, with a consensus target of $18. One commentator notes that half of the company’s $380 million market cap is held in cash. Additionally, the company’s price/book is at 1.0, making this a relatively safe value investment. Though the company has reported very modest earnings, it initiated a quarterly dividend this year with a 2.4 percent yield.
Asset Acceptance Capital
Asset Acceptance Capital Corp (NASDAQ:AACC) purchases and collects defaulted credit from a number of different credit originators. The company’s forward P/E is 14.0, and the company’s operating margin is 18 percent. The company recently announced that it will be expanding its operations in Florida while winding down some of its operation in Nevada, with a net restructuring cost of $0.9 million. Shares are up 90 percent year-to-date.