Prescott Group is Betting Big on These Micro-Cap Stocks for Q2

Oklahoma-based Prescott Group Capital Management recently disclosed its U.S equity portfolio as of the end of March via a 13F filing submitted with the Securities and Exchange Commission. The long/short equity hedge fund was founded by Phil Frohlich in 1992 and currently manages over $650 million in assets. According to the fund’s latest filing, its U.S equity portfolio was valued at $420.18 million at the end of March, a marginal decline from the $435.92 million that it was worth at the end of 2015. Though the fund manages a fairly diversified portfolio, its top-ten holdings accounted for over 40% of the value of its portfolio at the end of March. Since Prescott Group Capital Management is known for primarily investing in small and micro-cap companies, it’s not a surprise that all five of its largest equity holdings were micro-cap stocks as of March 31. In this article, we will go through those five holdings and try to gauge why the fund bullish on these unheralded equities and whether other investors should be as well.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Enova International Inc (NYSE:ENVA)

 – Shares Held by Prescott Group Capital Management (as of March 31): 1.91 million

 – Value of Holding (as of March 31): $12.05 million

Technology and analytics company Enova International Inc (NYSE:ENVA) jumped to the fifth spot in Prescott Group Capital Management’s portfolio by the end of the first quarter, owing to a 33% increase to the fund’s stake in the company during the quarter. Enova International Inc (NYSE:ENVA) became a separate publicly-traded company in November 2014 after its spin-off from Cash America International Inc (NYSE:CSH) was completed. Since its IPO, shares of the company have declined considerably despite a 32.28% rise this year, as they are still trading down by over 70% from their IPO price of $30 per share. A large part of the gains the stock has seen this year came on April 29, a day after the company reported its first quarter financial results. While analysts had anticipated the company reporting EPS of $0.21 on revenue of $165.28 million for the quarter, Enova International managed to soundly beat expectations by declaring EPS of $0.31 on revenue of $174.65 million. Following the earnings release, analysts at FBR & Co. reiterated their ‘Market Perform’ rating on the stock, but upped their price target on it to $8.50 from $6.50. Chuck Royce‘s Royce & Associates increased its stake in Enova International by 20% to 1.07 million shares during the fourth quarter.

#4 PharmAthene, Inc. (NYSEMKT:PIP)

 – Shares Held by Prescott Group Capital Management (as of March 31): 7.98 million

 – Value of Holding (as of March 31): $15.08 million

PharmAthene, Inc. (NYSEMKT:PIP) continued to remain Prescott Group Capital Management’s fourth-largest equity holding, with the fund making no change to its stake in the company during the first quarter. PharmAthene scored a major victory in December after the Delaware Supreme Court affirmed the Delaware Court of Chancery’s Judgment against SIGA Technologies, which provides an estimated total award of approximately $205 million plus interest to PharmAthene, Inc. (NYSEMKT:PIP). Though shares of  PharmAthene spiked in December after the decision, they gave up all of those gains over the next two months as investors feared that SIGA Technologies, which was under bankruptcy protection at that time, would be unable to pay the awarded damages to the former. However, shares did start rallying again in late-March after it became clear that SIGA Technologies will emerge from bankruptcy. On April 10, SIGA Technologies did indeed emerge from bankruptcy and paid an initial nonrefundable $5 million payment to PharmAthene. Alongside its fourth quarter results on March 11, PharmAthene revealed that it intends to distribute at least 90% of the after-tax proceeds of the $205 million award to shareholders. Sander Gerber‘s Hudson Bay Capital Management reduced its stake in PharmAthene by 24% to 2.34 million shares during the fourth quarter.

We dig into Prescott Group’s top three holdings on the next page.

#3 Servicesource International Inc (NASDAQ:SREV)

 – Shares Held by Prescott Group Capital Management (as of March 31): 3.57 million

 – Value of Holding (as of March 31): $15.20 million

Moving on, Prescott Group Capital Management increased its holding in Servicesource International Inc (NASDAQ:SREV) by 3% during the first quarter. Servicesource International Inc (NASDAQ:SREV)’s stock has declined by over 80% from the high of $22 that it hit in 2011, the year that the company had its IPO, and has lost 12.4% of its value so far this year. The enterprise cloud solutions company is expected to report its first quarter results next week and the consensus among analysts is for it to report a loss of $0.03 per share on revenue of $58.36 million, which would both represent year-over-year declines. The stock currently sports an average rating of ‘Overweight’ and an average price target of $6.17 from the three prominent analysts and research firms on the Street that track it. Investors that initiated a stake in Servicesource International during the fourth quarter included Bruce Salomon‘s Elberon Capital, which bought 1.16 million shares of the company.

#2 Nature’s Sunshine Prod. (NASDAQ:NATR)

 – Shares Held by Prescott Group Capital Management (as of March 31): 1.86 million

 – Value of Holding (as of March 31): $17.91 million

Nature’s Sunshine Prod. (NASDAQ:NATR) completed a decade of being a part of Prescott Group Capital Management’s equity portfolio in the first quarter. The fund hasn’t made any changes to its stake in the company over the past several years, with it ranking as the fund’s second-largest holding dating back to early 2013. Shares of Nature’s Sunshine Prod. (NASDAQ:NATR) have been on a gradual decline since September 2013 and have lost over 10% of their value so far this year. However, this decline has helped increase the dividend yield of the stock to 4.18%. Most analysts who track the stock feel that it will continue to underperform however, due to a flawed business model. Analysts assert that nearly all of the company’s products are overpriced and of lower quality compared to similar products from other brands and that this is hampering the company’s ability to recruit new distributors. With ownership of over 2.4 million shares of the company, Willem Mesdag‘s Red Mountain Capital was its largest shareholder at the end of 2015 among the funds in our database.

#1 Air Transport Services Group Inc. (NASDAQ:ATSG)

 – Shares Held by Prescott Group Capital Management (as of March 31): 4.18 million

 – Value of Holding (as of March 31): $63.33 million

Despite Prescott Group Capital Management reducing its stake in Air Transport Services Group Inc. (NASDAQ:ATSG) by 17% during the first quarter, the company remained its top stock pick at the end of that period, where it has also remained since early 2013. Shares of Air Transport Services Group Inc. (NASDAQ:ATSG) rallied significantly  in the first quarter on the back of the company signing a logistics deal with e-commerce behemoth Amazon.com, Inc. (NASDAQ:AMZN). As part of its deal with Amazon.com, Air Transport Services Group will be leasing 20 Boeing 767 freight aircraft to Amazon Fulfillment Services while the former will hold warrants giving it the right to acquire up to a 19.9% stake in the latter over a five-year period. For the first quarter, analysts expect Air Transport Services Group to report EPS of $0.14 on revenue of $167.12 million, compared to the EPS of $0.14 on revenue of $147.02 million it had reported for the same quarter of last year. D.E Shaw, founded by billionaire David E. Shaw, upped its stake in Air Transport Services Group by 10% to 425,065 shares during the fourth quarter.

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