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Rosetta Stone Inc (RST): Osmium Trims Stake in Its Top Pick, Plus Fund’s Other Top Holdings

John H. Lewis’ Osmium Partners revealed in a filing with the SEC last week that it has trimmed its stake in its largest holding, Rosetta Stone Inc (NYSE:RST) by about 7%, selling 148,500 shares in a number of transactions in 2015, the majority of which took place in early March. After the sales, Osmium holds 1.98 million shares, representing a 9.3% activist stake in the company.

Rosetta Stone Inc

Osmium Partners is a value-based long/short fund founded in 2002 by Lewis. The fund invests primarily in small-cap companies with market values of less than $1 billion, particularly in undervalued companies with strong but misunderstood business models. The fund maintains a small, concentrated equity portfolio, with 23 long positions as of the end of 2014, with the fund’s top five picks accounting for over 50% of the value of the portfolio. Moreover, 67% of the fund’s equity portfolio was invested in tech stocks.

Leading that portfolio was Rosetta Stone Inc (NYSE:RST), which accounted for 15.20% of Osmium’s portfolio at the end of 2014, remaining the fund’s top pick for the second straight quarter. Its 2.13 million shares at the time were valued at $20.78 million. While gross margins are high, sales of the company’s language learning software dissapointed investors for much of 2014, which led to a 20.65% loss on the year. Shares are also down a hefty 66.94% since its IPO.

Despite that, there is a lot to like about the company, which looks very undervalued in a number of key metrics. Most notable is the Enterprise-Value-to-Sales (EV/Sales) ratio of just 1.2x, well below the education industry average of 3.7x. Rosetta Stone Inc (NYSE:RST) reports its fourth quarter results on Wednesday, with David Nierenberg of Nierenberg Investment Management likely to be one of the most interested parties. Nierenberg owns around 1.51 million shares as of the end of 2014; the $14.78 million stake amasses 19.66% of its equity portfolio, which is the largest share among the funds that we track.

Nierenberg last summer welcomed the news that Osmium had changed its stake in Rosetta Stone from passive to activist, and hoped the fund would bring the same passion to guiding Rosetta Stone that it had shown in some of its other activist positions of late.