According to a recent filing with the SEC, Ralph V. Whitworth‘s Relational Investors has shaved some 2.74 million shares off its holding in Magnum Hunter Resources Corp (NYSE:MHR). The current holding comprises 27.50 million shares that the firm owns indirectly through its affiliated funds, and represents about 13.2% of the company’s outstanding common stock. Relational also had to dispose of some 2.14 million warrants that gave the fund the right to buy the stock at a conversion price of $8.50, since it was highly unlikely that they would be exercised given the current trading levels. Magnum Hunter withdrew the registration of these derivatives.
Professional investors like Whitworth spend considerable time and money conducting due diligence on each company they invest in, which makes them the perfect investors to emulate. However, we also know that the returns of hedge funds on the whole have not been good for several years, underperforming the market. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performances as a whole have been poor. Why pay fees to invest in both the best and worst ideas of a particular hedge fund when you can simply mimic the best ideas of the best fund managers on your own? A portfolio consisting of the 15 most popular small-cap stock picks among the funds we track has returned more than 142% and beaten the market by more than 83 percentage points since the end of August 2012, and by 4.6 percentage points in the first quarter of this year (see the details).
Founded in 1996, Relational Investors has some of the world’s largest pension funds as its clients. The firm’s investment philosophy revolves around using rigorous research to identify undervalued companies. The company strives to engage the management and board of the target companies in order to engage in a constructive dialogue to increase shareholder value. Currently the fund has about $2.87 billion in assets under management, while the market value of its public equity portfolio stood at $2.38 billion at the end of March. The fund’s top holdings at the end of the first quarter included Mondelez International Inc (NASDAQ:MDLZ), Hologic, Inc. (NASDAQ:HOLX), and Bunge Ltd (NYSE:BG). The consumer staples and industrials sectors each represented 36% and 31% of Relational’s portfolio value respectively.
Recently, Magnum Hunter Resources Corp (NYSE:MHR) was downgraded by Imperial Capital to ‘Underperform’ from ‘In-line’ and its price target was cut to $.25 from $1.75. The main reason for this loss of confidence is the $252.04 million energy company’s cash position, which is deemed insufficient by Imperial given MHR’s debt burden. Although the company has previously announced liquidity initiatives to the tune of $300 million, Imperial believes that the target might be unrealistic. So far this year, Magnum Hunter Resources Corp (NYSE:MHR)’s stock has slumped by nearly 60%. The hedge fund interest, among those that we track, has dwindled significantly over the first quarter as only 10 firms had investments in the company totaling $121.82 million at the end of March compared to 15 funds with $193.13 million at the end of last year. Todd J. Kantor‘s Encompass Capital Advisors is one of them, owning 5.37 million shares valued at $14.33 million.