David Nierenberg‘s Nierenberg Investment Management turned its passive stake in Rosetta Stone Inc (NYSE:RST) to an activist holding, according to a Schedule 13D filing. The fund owns about 1.51 million shares constituting 7% of the company’s outstanding stock. Nierenberg has already proposed several changes to Rosetta Stone’s board of directors regarding the company’s executive leadership. This is in connection with the company’s new strategy to realign resources around its Global Enterprise & Education segment.
Nierenberg Investment follows an interesting strategy; the fund invests in stocks and other instruments of publicly traded entities that they deem as undervalued and not widely followed by securities analysts, institutional investors and others in the investment community. This includes micro-cap stocks with market capitalizations below $1.5 billion. The firm typically holds its holdings for about five to seven years, which explains the fund’s low turnover ratio of 14.29% during the fourth quarter. Market value of the firm’s portfolio stood at $75.12 million, with 62% of the portfolio value dedicated to the information technology sector. Electro Scientific Industries, Inc. (NASDAQ:ESIO), Rosetta Stone Inc (NYSE:RST) and C&J Energy Services Inc (NYSE:CJES) were among the company’s top holdings.
Nierenberg Investment is also an interesting case in the sense that its investment strategy conforms with our research. After analyzing several years of 13F filings of a number of hedge funds, we have uncovered that an equally weighted portfolio of 50 hedge funds’ most popular picks, most of which were large cap companies, performs much worse than the small cap picks of these investment firms. We have been sharing these picks since August 2012 in our newsletter, and they have significantly outperformed the market. Our small-cap hedge fund strategy beat the S&P 500 ETF (SPY) by a staggering 76.7 percentage points since August 2012 through March 2015 and returned 132%.
Electro Scientific Industries, Inc. (NASDAQ:ESIO) is a $196.51 million company that supplies laser-based manufacturing solutions to the microtechnology industry. As of the fourth quarter, Nierenberg Investment held some 3.17 million shares valued at $31.54 million. The position was the fund’s largest holding and accounted for 21.39% of the portfolio value. Jim Simons’ Renaissance Technologies and Jim Tarantino and Chris Galvin’s Westerly Capital Management were other significant stakeholders in the company with 303,900 shares valued at $2.36 million and 721,400 shares valued at $5.6 million.
Electro Scientific Industries, Inc. (NASDAQ:ESIO) is down by nearly 40% over the last 52 weeks on account of industry overcapacity and a decrease in demand from the consumer electronics sector. Moreover, orders from one of its largest customers, Apple Inc. (NASDAQ:AAPL) fell sharply during this time. However, orders from other customers have starter to kick in as the company tries to make a turnaround, the progress of which is reflected in the financial results of the third fiscal quarter that included a net share loss of $0.15, beating estimates by $0.04 and $43.66 million revenues also came in $3.49 million higher.
C&J Energy Services Inc (NYSE:CJES)‘s position in Nierenberg’s portfolio comprised of 919,000 shares valued at $19.7 million. Among over 700 hedge funds that we track, a number of them trimmed their stake in the company as the aggregate amount invested in the company at the end of the fourth quarter fell to $96.29 million from $289.64 million a quarter earlier. Israel Englander‘s Millenium Management was one such firm that reduced its holding by 64% in the fourth quarter to 227,700 shares valued at $3.60 million.
C&J Energy Services Inc (NYSE:CJES) dipped by some 64% during the last year. The provider of hydraulic fracturing, coiled tubing, wireline and other complementary services with a focus on well completions has been badly affected by the tumbling oil prices.
Rosetta Stone Inc (NYSE:RST) is Nierenberg Investment’s fourth largest holding as the fund held some 1.8 million shares of the provider of cloud-based language learning solutions, valued at $22.27 million. The company’s stock has dipped by about 21% over the last year, with a large part of that decline coming after Rosetta Stone Inc (NYSE:RST) missed fourth quarter estimates. Net loss per share of $1.01 was $0.88 lower than expected, while revenues of $79.25 missed the mark by $2.07 million. The company is aiming to cut its consumer product investments and instead focus on enterprise/education opportunities. Among the hedge funds that we track, John W. Roger’s Ariel Investments had the largest holding in the company with 3.85 million shares valued at $37.57 million