Prescott Group’s Favorite Consumer Stocks for Q3; Direct Selling Companies among Top Picks

Prescott Group Capital Management, LLC, an Oklahoma-based asset management firm founded in 1992, predominantly invests in small- and mid-capitalization publicly traded companies. The investment firm, run by Phil Frohlich, mainly focuses on the fundamental analysis of each company under review and its potential for success in light of its current financial condition, industry position, as well as economic and market conditions.

Rather than using the traditional 2-and-20 payment structure used in the hedge fund industry, Prescott Group Capital Management charges clients an annual asset-based administrative service allocation equal to 1% of the invested capital, as well as a performance-based profit allocation equal to 20% of investors’ returns in excess of the hypothetical return that would have been realized in an investment in a comparable index. This may serve as a benchmark payment structure for the entire hedge fund industry for the foreseeable future, especially considering the recent underperformance of the industry. As consumer stocks have weathered the recent market volatility better than broader market benchmarks this year, Insider Monkey decided to compile a list of five consumer stocks favored by the Oklahoma-based asset manager.

At Insider Monkey, we track around 770 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).

#5. Lennar Corporation (NYSE:LEN)

– Number of shares owned by Prescott as of June 30: 88,822

– Aggregate value of Prescott’s holding as of June 30: $4.10 Million

Prescott Group Capital Management held its position in Lennar Corporation (NYSE:LEN) unchanged during the second quarter of 2016 at 88,822 shares. The stake was worth $4.10 million at the end of the quarter and accounted for roughly 1.0% of the firm’s entire portfolio. The shares of the homebuilder are flat so far in 2016, thanks to a 6% gain in the value of Lennar shares in the past month. Just recently, Lennar Corporation has released its financial results for the fiscal second quarter of 2016, ended May 31, showing that revenues increased to $2.45 billion from $2.12 billion posted a year ago. The increase was mainly driven by a 12% increase in the number of home deliveries and a 4% increase in the average sales price of homes delivered. In late June, analysts at Raymond James upgraded Lennar to ‘Outperform’ from ‘Market Perform’ and established a $53 price target, saying that the company’s 10% increase in new orders to 7,962 homes came in ahead of expectations. Ricky Sandler’s Eminence Capital acquired a new stake of 3.03 million shares of Lennar Corporation (NYSE:LEN) during the March quarter.

#4. Civeo Corporation (Canada) (NYSE:CVEO)

– Number of shares owned by Prescott as of June 30: 5.09 Million

– Aggregate value of Prescott’s holding as of June 30: $9.16 Million

The Oklahoma-based asset manager upped its stake in Civeo Corporation (Canada) (NYSE:CVEO) by 1.46 million shares during the April-June period, ending the second quarter with 5.09 million shares. The stake was valued at $9.16 million at the end of the quarter and made up 2.2% of the hedge fund’s portfolio. The Houston-based provider of workforce accommodations for the natural resource industry in Canada, Australia and the U.S. has seen the value of its stock gain 9% since the start of 2016. In early March, Civeo Corporation was warned of delisting by the New York Stock Exchange as the company’s stock price nosedived below the $1-per-share price level amid depressed conditions in the crude oil industry, but the stock has somewhat recovered since then alongside crude oil prices. Demand for the company’s services are closely tied to the outlook for crude oil and met coal prices. Jim Simons’ Renaissance Technologies LLC owned 5.73 million shares of Civeo Corporation (Canada) (NYSE:CVEO) on March 31.

#3. Destination XL Group Inc. (NASDAQ:DXLG)

– Number of shares owned by Prescott as of June 30: 2.14 Million

– Aggregate value of Prescott’s holding as of June 30: $9.79 Million

The small- and mid-cap-focused hedge fund owned 2.14 million shares of Destination XL Group Inc. (NASDAQ:DXLG) both at the end of the second and first quarter of 2016. The unchanged position was worth $9.79 million at the end of the June quarter, accounting for 2.4% of the hedge fund’s portfolio. The shares of the largest specialty retailer of big and tall men’s apparel with retail and direct operations in the United States and England are 13% in the red year-to-date. Destination XL Group’s DXL comparable sales increased 5.8% for the three months that ended April 30, reflecting a 3.4% increase in the total number of transactions, a 3.5% increase in the units per transaction, as well as a 2.3% increase in dollars per transaction. The company’s capital expenditures for fiscal 2016 are expected to reach roughly $30 million, most of which will be channeled towards the opening of 28 DXL retail stores and 3 DXL outlet stores. Willem Mesdag’s Red Mountain Capital was the owner of 7.52 million shares of Destination XL Group Inc. (NASDAQ:DXLG) at the end of the first quarter.

#2. Nu Skin Enterprises Inc. (NYSE:NUS)

– Number of shares owned by Prescott as of June 30: 250,118

– Aggregate value of Prescott’s holding as of June 30: $11.55 Million

The asset manager run by Phil Frohlich increased its exposure to Nu Skin Enterprises Inc. (NYSE:NUS) by 134,856 shares during the second quarter to 250,118 shares. The reshuffled stake was valued at $11.55 million on June 30, constituting 2.8% of the fund’s portfolio. The direct selling company that develops and distributes premium-quality personal care products and nutritional supplements has seen its market value jump by 34% since the start of 2016. The maker of personal care products has been previously accused of operating an illegal pyramid scheme in China, prompting a government investigation and resulting in a fine of $500,000. Although Herbalife Ltd. (NYSE:HLF), another multi-level marketing company, has not been called a pyramid scheme by the Federal Trade Commission, the restrictions Herbalife agreed to as part of its settlement with the FTC may dramatically slow down growth for the entire direct selling industry. Ray Carroll’s Breton Hill Capital increased its position in Nu Skin Enterprises Inc. (NYSE:NUS) by 20% during the second quarter to 21,361 shares.

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

– Number of shares owned by Prescott as of June 30: 1.87 Million

– Aggregate value of Prescott’s holding as of June 30: $17.78 Million

Nature’s Sunshine Prod. (NASDAQ:NATR) was the third-largest holding in Prescott Group Capital Management’s pool of holdings at the end of June, accounting for 4.3% of the hedge fund’s portfolio. The 1.87 million-share stake did not suffer any adjustments during the second quarter and was valued at $17.78 million on June 30. The natural health and wellness company engaged in the direct selling of nutritional and personal care products has seen the value of its stock gain 10% thus far in 2016. The company’s first-quarter net sales decreased by 1.8% year-over-year to $82.40 million. Nature’s Sunshine Products net sales in Russia, Central and Eastern Europe decreased a disturbing 14.7% in the first quarter. Sales in this region are anticipated to be affected by political unrest in Ukraine and Russia, sanctions against Russia, as well as the meaningful impact of currency devaluation. Nelson Obus’ Wynnefield Capital had 2.11 million shares of Nature’s Sunshine Prod. (NASDAQ:NATR) among its holdings at the end of the first quarter.

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