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ITT Educational Services, Inc. (ESI), Rovi Corporation (ROVI): Activists Launch Proxy on One, Slash Stake in the Other

Glenn W. Welling’s Engaged Capital recently filed preliminary proxy materials with the Securities and Exchange Commission concerning Rovi Corporation (NASDAQ:ROVI), as the activist fund has seemingly lost patience in its efforts to affect changes in the company, in which it owns a small 549,900 share stake as of the end of 2014, 0.6% of all common shares. In a separate filing, Richard Blum’s (pictured) Blum Capital Partners disclosed further slashing its stake in ITT Educational Services, Inc. (NYSE:ESI) to 1.16 million shares from the 1.63 million shares it owned at the end of 2014.

 Richard Blum

Activist campaigns like the one Engaged Capital is in the midst of with Rovi have proven to be popular among investors, who appreciate the fund’s intentions of increasing shareholder value, often piggybacking their moves as a result. However, we’ve found an even better way to profit from the activity of top hedge funds through our research. In backtests conducted for the period between 1999 through 2012, we found that a collection of the top 15 small-cap picks of hedge funds outperformed the S&P 500 Total Return Index by almost one percentage point per month. In forward tests since August 2012, the system has continued to beat the S&P 500, returning 132% through March, 2015, compared to 52.6% for the index (read more details).

Engaged Capital has been a shareholder of Rovi Corporation (NASDAQ:ROVI) since April 2013 and the company has been one of the fund’s top five picks since its first 13F filing, for the end of the 2013. During that time the fund has attempted to engage Rovi Corporation (NASDAQ:ROVI) management and the board to improve the performance of the company and increase shareholder value, bringing up issues such as the company’s strategy, cost structure, capital allocation, executive compensation, and corporate governance.

On March 12, frustrated at the board’s unwillingness to conduct a constructive dialogue and work to find new qualified directors for the company, the fund sent an open letter to Rovi Corporation (NASDAQ:ROVI)’s board nominating four of its own directors, including Mr. Welling himself, who was also recently awarded a seat on Jamba Inc. (NASDAQ:JMBA)’s board. Rovi issued a statement concerning the letter on the same day, expressing disappointment of its own that Engaged Capital had not remained patient during the search for directors, which Rovi has been conducting through an independent executive recruiting firm. The statement further criticized Engaged for undermining the selection process by not allowing interview access to the fund’s recommended nominees.

As Engaged pointed out in its letter, returns for shareholders of Rovi have been negative over the last seven years. Shares have been particularly battered over the past five years and are down by over 70% since peaking at $68.56 on January 14, 2011. Most recently, shares plunged 12% on March 25 after a “speculative report” emerged concerning its lawsuit against Netflix, Inc. (NASDAQ:NFLX). Rovi has insisted that no ruling has been made or will be made for the next couple of months.

Chuck Royce’s Royce & Associates is the largest shareholder of Rovi Corporation, among the funds that we track, holding 1.36 million shares at the end of 2014. Joel Greenblatt’s Gotham Asset Management is next in line with just over 948,000 shares.

Blum Capital’s latest slashing of its position in ITT Educational Services, Inc. (NYSE:ESI) follows similar a similar move in late 2014, as it cut its stake down to 1.85 million shares at the time, from the 2.0 million shares it held previously. Moreover, throughout 2013,the stake was reduced from 3.34 million shares at the start of the year, to 2.30 million shares held by the end. ITT Educational Services, Inc. (NYSE:ESI) was one of just five positions held by Blum Capital in its equity portfolio at the end of 2014, though the portfolio was nonetheless valued at over $578 million.

It has not been a case of taking profits from the position for Blum Capital, a fund that was founded in 1975 and is based in San Francisco. Instead, the fund has been slashing its position despite shares deteriorating over the past five years, losing 94% of their value. Nor have they fared any better over the last one-year period, dipping by 75.18%.

Much of ITT Educational Services, Inc. (NYSE:ESI)’s woes began in May, 2010 at the Ira Sohn Conference, when Steve Eisman, former hedge fund manager of the now defunct Frontpoint Partners and Emrys Partners, took aim at ITT and other private colleges for their dubious practices. Eisman declared them “seamy mortgage brokers”, and urged the department of education officials to investigate the way in which the schools recruited and gave loans to students. The Obama administration eventually found that ITT and other institutes had indeed abused government-loan programs.

Despite its downward spiral, ITT Educational Services, Inc. (NYSE:ESI) has more than 15 hedge funds (among those we track) with long positions in its company. Robert Joseph Caruso’s Select Equity Group is the largest among them as of the end of 2014, with ownership of 2.26 million shares.

Disclosure: None