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Engaged Capital’s AUM, Holdings and Performance

Glenn W. Welling started Enaged Capital in 2012 after having worked since 2008 at the renown activist fund Relational Investors, led by Ralph V. Whitworth. At Relational Investors, Mr. Welling served as a Principal and Managing Director, having been responsible for managing the consumer, healthcare, and utility group. Since its foundation and until May 2016, Engaged Capital, which was launched with an initial investment of $85 million from GCM Grosvenor, posted an annualized return of 7.1%, according to Value Investor Insight.

After leaving Relational, Mr. Welling brought his expertise of increasing shareholder through activist investing to a new market segment: small-cap companies. Mr. Welling reasoned that smaller-cap stocks can also benefit from the involvement of shareholders, but big activists, like Pershing Square, Third Point, ValueAct, etc., don’t really get involved in them, due to their small size. However, there are much more smaller-cap firms and many of them have ineffective boards, little research coverage, and their management can be lacking the required skills sets. In this way, as Mr. Welling put it in an interview with Value Investor Insight, Engaged Capital can bring “large-cap-quality insights to small- and mid-cap companies.”

In the same interview, Welling said that their investment strategy focuses on stocks with market-caps between $300 million and $8.0 billion, but they exclude companies from highly-regulated, or commodity-based sectors, like energy, financial, and utilities. Engaged also excludes companies with two share classes, as well as those with high insider ownership (over 20%) and whose float has less than 50% of the outstanding shares.

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Engaged invests mainly in firms that are performing well in their markets and have high returns on capital, generate good cash flow, and low leverage, and then delves deeper to understand the reasons behind the stock’s underperformance. The fund analyzes the financial information in order to identify the aspects that can be fixed in order to change the market’s perception, and then looks into the governance, and tries to get a sense of the shareholders’ sentiment, which can show whether other investors would be interested in changes.

Since its initial investment of $85 million, Engaged Capital has grown to around $374.29 million in regulatory assets under management. In its latest 13F filing, Mr. Welling’s fund disclosed an equity portfolio worth $673.77 million as of the end of June, which is significantly higher compared to $394.17 million a quarter earlier. The increase in the portfolio can be attributed to the fund increasing its position in five holdings and the addition of four new positions. At the same time, Engaged Capital closed its stake in three companies and trimmed three other holdings. Overall, the fund’s equity portfolio is relatively concentrated as it contains 15 positions, which are spread mainly across three sectors (as Mr. Welling avoids highly-regulated sectors): Consumer Staples, Consumer Discretionary, and Technology.

On the following pages, we are going to take a closer look at some of Engaged Capital’s largest investments and discuss the actions the activist took to push for changes at those companies.

1. Hain Celestial Group Inc (NASDAQ:HAIN)

In Hain Celestial Group Inc (NASDAQ:HAIN), Engaged Capital boosted its stake by some 6.16 million shares during the second quarter. In this way, the fund held 8.04 million shares of the company worth $312.24 million at the end of June, according to its latest 13F filing. At the same time, in a 13D filing on June 29, the fund also disclosed holding some 2.31 million shares underlying call options, which raises its position to 10.35 million shares, or 9.9% of the company’s stock. Engaged Capital initiated a stake in Hain Celestial Group in the first quarter, and when it boosted its position in June, it also announced that it had submitted seven candidates to the company’s eight-person board. Overall, there were 35 funds tracked by us long Hain Celestial Group Inc (NASDAQ:HAIN), including Philippe Laffont‘s Coatue Management, Larry Robbins‘ Glenview Capital, and David Tepper‘s Appaloosa Management.

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2. Rent-A-Center Inc (NASDAQ:RCII)

In Rent-A-Center Inc (NASDAQ:RCII), Engaged Capital disclosed a $105.29  million position, which contained 8.98 million shares at the end of June. The fund added Rent-A-Center Inc (NASDAQ:RCII) to its portfolio in December 2016 and sent a letter to the company, in which it highlighted its underperformance and major setbacks, and suggested that the board should look into finding buyers to take rent-A-Center private. On February 14, Engaged sent another letter, in which it expressed frustration with the board’s unwillingness to act, while a couple of weeks later it sent another letter in which it nominated three directors to be elected to the company’s board. In June, all three of Engaged Capital’s nominees were elected to the board. At the same time, the company’s co-founder and CEO Mark E. Speese was voted off the board, although he remains the CEO and was accused by Engaged on several occasions of trying to maintain the status quo. In April, another activist fund, Mick McGuire‘s Marcato Capital Management, also disclosed a stake and urged for the sale of Rent-A-Center Inc (NASDAQ:RCII), having added that it would also back Engaged Capital. At the end of June, Marcato held 682,342 shares of Rent-A-Center, up by 60% on the quarter.

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3. SunOpta, Inc. (USA) (NASDAQ:STKL)

Engaged Capital has held shares of SunOpta, Inc. (USA) (NASDAQ:STKL) since the second quarter of 2016 and at the end of June it owned 6.76 million shares valued at $68.92 million. Last September, Engaged Capital signed a confidentiality agreement with SunOpta, Inc. (USA) (NASDAQ:STKL). In October, the company appointed one director nominated by Engaged, as well as two directors from another activist, Howard Marks‘ Oaktree Capital Management. In addition, SunOpta has been targeted by several other activists, including Tourbillon Capital Partners and West Face Capital, both of which pushed for the sale of the company last year. Tourbillon Capital Partners is the largest shareholder of SunOpta, Inc. (USA) (NASDAQ:STKL) among the funds we track, holding 7.89 million shares, while Oaktree Capital Management and West Face Capital hold 4.39 million shares and 884,610 shares, respectively.

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4. TiVo Corp (NASDAQ:TIVO)

TiVo Corp (NASDAQ:TIVO) represents Engaged Capital’s fourth-largest stake, which contains 2.52 million shares worth $47.09 million. Engaged Capital has held shares of the company since 2013, when it was called Rovi Corporation. In 2016, Rovi Corporation bought TiVo for $1.1 billion and Mr. Welling was a key player in orchestrating the deal. In 2015, Engaged Capital obtained two board seats and pushed for the merger. Mr. Welling still sits on TiVo Corp (NASDAQ:TIVO)’s board of directors. During the second quarter, the number of investors from our database bullish on TiVo Corp (NASDAQ:TIVO) declined by five to 17.

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5. Medifast Inc (NYSE:MED)

Last, but not least, Engaged Capital held 789,549 shares of Medifast Inc (NYSE:MED) valued at $32.74 million at the end of June. After having initiated a stake in 2014, Medifast Inc (NYSE:MED) and Engaged reached an agreement to reshuffle the company’s board by nominating five directors in April 2015. Engaged nominated three, including Mr. Welling, and both parties jointly selected two other independent directors to join the nine-person board. Medifast Inc (NYSE:MED) has surged by over 86% since Engaged and Medifast Inc (NYSE:MED) agreed to reconstitute the board. At the end of June, 11 funds tracked by Insider Monkey held shares of Medifast, down by two over the quarter.

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Disclosure: none