Orange Capital’s Top Picks Ahead of Its Closure

When reports of liquidity drying up in the credit market started emerging last year, most large investors dismissed it as cyclical phenomena and blamed other market players for overreacting. However, in the last few months, we have seen concerns being raised from several quarters about this liquidity crisis. Of late the situation has become so dire that many high-yield and distressed debt-focused fund are finding it hard to sell their assets without causing a mayhem in the market. The latest casualty of this deterioration in market liquidity is a New York-based event-driven activist hedge fund Orange Capital. In February, the fund led by Daniel Lewis sent a letter to its investors informing them that it is shutting shop after 10 years of operations. In the letter, the management of the fund also provided a brief explanation as to why it is closing the fund saying, “We believe that credit investing through traditional, liquid hedge fund strategies will prove challenging for investors as the credit cycle turns. This includes our own hedge fund structure”.

Though Orange Capital’s flagship fund has delivered annualized returns of 9.7% since its inception in mid-2005, it failed to generate positive returns last year. According to Reuters, the fund ended 2015 down by 7.4% net of fees. Insider Monkey’s own analysis of Orange Capital’s 13F holding shows in companies worth at least $1 billion shows that 11 long positions held by the fund during 2015 delivered a negative weighted average return of 11.4 % for the year. The fund recently submitted its 13F filing with the SEC, revealing a US equity portfolio worth nearly $992 million, as of December 31. Since this is going to be the last 13F filing submitted by Orange Capital, in this post we will take a closer look at the top five stocks it was bullish on going into 2016.

At Insider Monkey, we track more than 700 hedge funds, whose 13F filings we analyze as part of our small-cap strategy. Our research has shown that imitating a portfolio that includes the 15 most popular small-cap stocks among hedge funds can outperform the market by as much as 95 basis points per month on average (see more details here).

#5 Northstar Realty Finance Corp (NYSE:NRF)

– Shares owned by Orange Capital (as of December 31): 3.08 million

–Value of Holding (as of December 31): $52.5 million

Let’s start with Northstar Realty Finance Corp (NYSE:NRF), in which Orange Capital reduced its stake by 24% during the fourth quarter. The commercial real estate company had an extremely busy fourth quarter as immediately after spinning off its European real estate business into a separate publicly traded entity, Northstar Realty Europe Corp (NYSE:NRE), the company conducted a one-for-two reverse stock split of its common stock. Shares of Northstar Realty Finance Corp (NYSE:NRF) have declined gradually since this reverse stock-split materialized. Although the stock was trading deep in the red year-to-date till a few days ago, it has recouped some losses since the company reported its fourth quarter earnings and it is currently down by 10.84% since the beginning of 2016. Along with its earnings release, the company also announced that it is reducing its quarterly dividend to $0.40 per share, which represents an annual dividend yield of over 12% at its current stock price. In January, Jonathan Litt’s Land & Buildings sent a letter to the company urging it to recombine with NorthStar Asset Management Group Inc (NYSE:NSAM), following which the company added a new independent director to its board to evaluate this alternative.

#4 Howard Hughes Corp (NYSE:HHC)

– Shares owned by Orange Capital (as of December 31): 519,004

–Value of Holding (as of December 31): $58.73 million

Orange Capital increased its stake in Howard Hughes Corp (NYSE:HHC) by 174% during the fourth quarter, which led the company to jump several spots in the fund’s equity portfolio and emerge as its fourth-largest equity holding at the end of December. Though shares of Howard Hughes Corp (NYSE:HHC) have declined by over 35% since last April, they recently started rallying in anticipation of the company’s fourth quarter numbers and currently trade down 13.3% for 2016. The company reported EPS of $0.59 on revenue of $229.40 million for the fourth quarter versus analysts’ estimates of a loss of $0.09 per share on revenue of $124.40 million. Both of the two major research firms that track the stock currently have a ‘Buy’ rating on it with an average price target of $180. Kenneth Squire‘s 13D Management also boosted its stake in the company by 375% to 159,922 shares during the fourth quarter.