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.
#3 Global Indemnity plc (NASDAQ:GBLI)
– Shares held by Springhouse Capital Management (as of March 31): 599,148
– Value of Holding (as of March 31): $18.65 million
Moving on, Springhouse Capital increased its stake in Global Indemnity plc (NASDAQ:GBLI) by 13% during the first quarter. Shares of the insurance provider have been on a slow but steady bull run since 2012, appreciating by over 50% since then. They recently hit their 52-week high of $32.09, but are currently trading up by only 5% year-to-date, owing to a decline in the last few trading sessions. Some analysts believe that shares of Global Indemnity plc (NASDAQ:GBLI) will find it hard to continue their rally in the coming quarters, as they are already trading at a considerable premium of 23.60-times expected 2016 earnings. For the first quarter, the company reported EPS of $0.41 on revenue of $141.4 million, compared to the EPS of $0.26 on revenue of $142.9 million it earned for the same quarter of last year. With ownership of 344,544 shares of Global Indemnity at the end of 2015, Ron Bobman‘s Capital Returns Management trailed only Springhouse Capital as the company’s largest shareholder among the funds covered by Insider Monkey.
#2 Morgan Stanley (NYSE:MS)
– Shares held by Springhouse Capital Management (as of March 31): 911,933
– Value of Holding (as of March 31): $22.81 million
Despite its stock plummeting by 21% during the first quarter, Morgan Stanley (NYSE:MS) jumped two spots during that period to become Springhouse Capital’s second-largest equity holding at the end of March, owing to the fund boosting its holding in the company by 143% during that time. After the first quarter rout, shares of Morgan Stanley (NYSE:MS) did stabilize in April, but are still trading down by 18.55% year-to-date. The investment bank came out with its first quarter numbers on April 18, declaring EPS of $0.55 on revenue of $7.79 billion, beating analysts’ consensus EPS estimate by $0.09, but missing on their revenue estimate by $80 million. Though Morgan Stanley is currently trading at a considerable discount to its tangible book value, several prominent analysts currently have a ‘Hold’ rating on the stock, including analysts at Credit Suisse, who on April 19 reiterated their ‘Hold’ rating. Richard S. Pzena‘s Pzena Investment Management also increased its stake in Morgan Stanley significantly during the first quarter, by 34% to 12.65 million shares.
#1 Citigroup Inc (NYSE:C)
– Shares held by Springhouse Capital Management (as of March 31): 626,000
– Value of Holding (as of March 31): $26.14 million
Among the stocks covered in this article, Springhouse Capital Management made the smallest percentage increase to its stake in Citigroup Inc (NYSE:C) during the first quarter, at 10%. However, the banking behemoth continued to remain the fund’s largest equity holding at the end of that period. Explaining his rationale behind adding more shares of Citigroup to his portfolio during the first quarter, Mr. Romick discussed the company in a letter to investors of the FPA Crescent Fund, saying that:
“If half of its China, energy and metals & mining loans were to default this year and Citi recovered just 40 cents on the dollar, and if consensus earnings are correct, then Citi would still earn money this year and end 2016 with more than $60 per share of tangible book value and tangible equity to tangible assets of more than 10%. That would mean book value would actually increase despite the write-offs. We, therefore, thought Citi at a 40% discount to its minimum worth was a great risk/reward.”
According to recent reports, the bank has put its Credit Card Merchant Acquiring business in Asia, which generates around $400 million in gross revenue, up for sale as part of its ongoing global plan to exit non-core businesses. Billionaire Ken Fisher‘s Fisher Asset Management trimmed its stake in Citigroup Inc (NYSE:C) by 1% to 12.02 million shares during the first quarter.