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Motiwala Capital Investor Letter: Why Small Fund Finds These Five Stocks Undervalued

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Looking through hedge funds’ letters to investors is a useful window into some processes behind their stock picking. In this article, we are going to take a closer look at Motiwala Capital, a small fund managed by Adib Motiwala. Motiwala Capital is a fee-only independent investment management firm based in Irving, Texas. Adib Motiwala, who received his MBA from the University of Texas, started managing separate accounts in 2011.

Currently, Motiwala Capital has around $4 million in assets. The fund uses a value-oriented approach in identifying investment opportunities among US-listed public companies. Since its inception in 2011, Motiwala’s annual performance has been mixed. The fund had a good start, outperforming the S&P 500 by 6.6 percentage points in 2011, by 4.3 percentage points in 2012, and by 1.3 percentage points in 2013. However, in the following two years its returns significantly lagged and last year Motiwala posted gains of 13.27%, versus the S&P 500’s 11.95% return. In the first six months of 2017, Motiwala only managed to return 2.72%, underperforming the Index by 6.62 percentage points.

Motiwala Capital’s portfolio is divided into two parts; the first includes undervalued equity investments while the other is focused on special situations. During the second quarter, Motiwala closed several positions, including Gilead Sciences, Inc. (NASDAQ:GILD), which generated a small loss for the fund as the company’s sales of Hepatitis C drugs declined. The fund also liquidated its stake in Viacom, Inc. (NASDAQ:VIAB) as Mr. Motiwala acknowledged that the investment had been a mistake. On the other hand, its investment in Oracle Corporation (NYSE:ORCL) resulted in a small-gain, although for a position held for nearly three years, the investor probably should’ve expected better results.

everything possible/Shutterstock.com

everything possible/Shutterstock.com

Moreover, during the first six months of 2017, Mr. Motiwala added several new positions to his fund’s portfolio. Given that the positions are in companies that the investor considers to be undervalued, let’s take a closer look at some of them.

Among Motiwala Capital’s top 10 holdings, Hostess Brands, Inc. (NASDAQ:TWNK) is on the fourth spot, amassing 3% of the portfolio; the fund’s position is through warrants. Hostess Brands, Inc. (NASDAQ:TWNK) is a packaged foods company that owns several well-known brands of baked products, such as Twinkies, HoHos, and CupCakes. It went public last year through a merger with a blank check company. In 2012, Hostess Brands filed for bankruptcy as it had become overburdened by debt. However, Mr. Motiwala thinks that its transformation following its bankruptcy, which included improvements to distribution and manufacturing, as well as the reduction in the number of plants and a better capital structure, is what makes Hostess Brands, Inc. (NASDAQ:TWNK) a good investment. Mr. Motiwala pointed out that the company has industry-leading margins and is re-capturing market share, and that even though it still carries some debt, it can pay it down with free cash flow.

Among the investors we track at Insider Monkey, Hostess Brands, Inc. (NASDAQ:TWNK) is overlooked. Out of over 650 funds, there were 21 funds that collectively held just 4.80% of the company’s outstanding stock at the end of June.

Alphabet Inc (NASDAQ:GOOG) amassed 2.8% of Motiwala Capital’s portfolio at the end of the first half of 2017. Mr. Motiwala went back into the stock after having sold a position in 2016. The investor first acquired shares of Alphabet Inc (NASDAQ:GOOG) in 2015 and obtained a 50% return when it sold the stake in 2016. However, now Mr. Motiwala believes that Alphabet Inc (NASDAQ:GOOG) was valued cheaper at the beginning of 2017, which is why he bought shares again.

Alphabet Inc (NASDAQ:GOOG) is one of the most popular stocks among the funds in our database, as there were 127 funds holding class C shares of the company and 128 funds reporting long positions in the class A stock. One of the top shareholders of  Alphabet is Eagle Capital Management, led by Boykin Curry, which reported holding 1.60 million class C shares of the tech giant in its latest 13F filing.

On the next page, we will present Motiwala’s positions in McKesson Corporation (NYSE:MCK), Big Lots, Inc. (NYSE:BIG), and New York REIT Inc (NYSE:NYRT).

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