Springhouse Capital Management is a Westport, Connecticut-based long/short equity hedge fund. The fund was founded by Brian Gaines in 2002 with seed money from Joel Greenblatt’s Gotham Asset Management, where Mr. Gaines worked as an intern and then a full-time employee while pursuing his MBA from the Wharton School of The University of Pennsylvania. Springhouse Capital Management primarily invests in value stocks of small-cap companies and currently manages assets in excess of $250 million. According to the fund’s latest 13F filing submitted with the Securities and Exchange Commission, its U.S equity portfolio was worth $188.78 million at the end of March, 31.4% more than it was worth at the end of 2015. The filing also revealed that during the first quarter, Springhouse Capital’s equity portfolio had a quarterly turnover rate of 26.67% and that stocks from the financial sector accounted for 70% of the value of the portfolio. Since the fund had high exposure to the financial sector at the end of March, we will take a look at its top five finance stock picks in this article and try to understand why Mr. Gaines’ fund is bullish on each of them.
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 Fortress Investment Group LLC (NYSE:FIG)
– Shares held by Springhouse Capital Management (as of March 31): 1.74 million
– Value of Holding (as of March 31): $8.33 million
Let’s start with Fortress Investment Group LLC (NYSE:FIG), in which Springhouse Capital Management increased its stake by 34% during the first quarter. The investment management company lost more than half of its market capitalization between April 2015 and January 2016, however, its stock has stabilized over the last few weeks and is trading flat in 2016. On April 18, analysts at RBC Capital reiterated their ‘Outperform’ rating on the stock, but lowered their price target on it to $9 from $10. For the first quarter, Fortress Investment Group LLC (NYSE:FIG) reported EPS of $0.04 on revenue of $231.60 million, widely missing analysts’ expectation of EPS of $0.14, but showing a nice top-line beat of $26.46 million. Among the funds that initiated a stake in Fortress Investment Group LLC during the fourth quarter was Eric Halet and Davide Serra’s Algebris Investments, which purchased 1.4 million shares of the company.
#4 Goldman Sachs Group Inc (NYSE:GS)
– Shares held by Springhouse Capital Management (as of March 31): 116,044
– Value of Holding (as of March 31): $18.22 million
Springhouse Capital Management more than doubled its stake in Goldman Sachs Group Inc (NYSE:GS) during the first quarter, lifting the holding to being the fourth-largest in the fund’s equity portfolio. Shares of Goldman Sachs Group Inc (NYSE:GS) have lost over 20% of their value this year, continuing their slide that began in the second-half of 2015. On April 20, the bank reported its first quarter earnings, declaring a 60% year-over-year drop in its net income and a fallin annualized return on equity figure, which fell to 6.4%. While analysts had expected the bank to report EPS of $2.45 on revenue of $7.24 billion, Goldman Sachs reported EPS of $2.68 on revenue of $6.34 billion. After failing to listen to analysts and investors, who argued that the bank should reduce its exposure to trading, especially fixed-income trading, in order to adapt to new regulations and improve its performance, recent actions by Goldman Sachs suggest that it has finally started paying heed to those concerns. On May 6, the Wall Street Journal reported that the bank is laying off another 100 employees from its fixed-income division. Including this lay-off, the firm has reduced its fixed-income staff by 10% so far this year. Edgar Wachenheim‘s Greenhaven Associates also increased its stake in Goldman Sachs during the first quarter, by 6% to 3.54 million shares.
The performance and prospects of Springhouse Capital Management’s top three finance stock picks are discussed on the next page.