In a recently submitted filing with the SEC, Michael Johnston‘s Steelhead Partners revealed that it has yet again trimmed its stake in Resolute Forest Products Inc (NYSE:RFP) and now owns around 6.9 million shares or 7.7% of the outstanding shares of the company, down from about 8.95 million shares that it held at the end of June. At its peak around two years ago, Steelhead Partners’ stake in Resolute Forest Products Inc (NYSE:RFP) consisted of over 13.0 million shares. Its present stake in Resolute Forest Products Inc (NYSE:RFP) is worth $65.66 million based on the company’s current share price.
Steelhead Partners, a Bellevue, Washington-based, value-focused equity hedge fund, was founded by Scott Schaefer and Michael Johnston in 1996. Prior to founding the fund, Mr. Schaefer and Mr. Johnston had worked at Loews Corporation (NYSE:L). Steelhead Partners usually employs contrarian investment strategies and according to its website, its investment style is “characterized by finding names that are out-of-favor and under-followed by Wall Street“. As of June 30, the fund’s U.S public equity portfolio was worth slightly above $1 billion with 42% of it invested in stocks from the information technology sector, with its top ten holdings overall accounting for 57.69% of the value of its portfolio.
We track hedge funds and prominent investors 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 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated ten percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 60 percentage points (131.8% return vs. the S&P 500’s 57.6% gain) over the last 36 months (see the details here).
Although the Montreal, Quebec-based forests product company has lost nearly half of its market capitalization this year, its popularity among hedge funds is on the rise. During the second quarter, when shares of the company had a 34.8% decline, the number of hedge funds covered by us that reported a stake in the company increased by four to 22, while in aggregate these funds accounted for ownership of almost 49% of the outstanding shares of Resolute Forest Products Inc (NYSE:RFP). ‘Canada’s Warren Buffett’, Prem Watsa, through his holding company Fairfax Financial Holdings, continued to remain the largest shareholder of the company at the end of June among the funds we track, owning slightly above 29.0 million shares, which represents a 31.76% stake of the company. Revered trader Steve Cohen‘s Point72 Asset Management was one of the hedge funds that initiated a stake in Resolute Forest Products Inc (NYSE:RFP) during the April-June period, and held 375,000 shares of the company as of June 30.
Interestingly, while shares of the company have slid significantly in the past couple of months, its financial performance has improved considerably during the same time. For the second quarter of 2015, while analysts were expecting the company to report a loss of $0.15 per share on revenue of $886 million, Resolute Forest Products Inc (NYSE:RFP) surprised the Street by reporting EPS of $0.07 on revenue of $926 million. Several analysts and experts that cover the stock believe that the major reason Resolute Forest Products Inc (NYSE:RFP) got crushed in the last few months was because investors overreacted to the ‘forestry crisis’ that emerged in Quebec’s North Shore region earlier this summer. However, with the company having reached an agreement with the Quebec government recently, under which the latter will compensate the former for the economic loss it suffered during the summer, there is hope among investors and people who track Resolute Forest Products Inc (NYSE:RFP)’s stock that it will do well in the short to medium-term. On July 10, analysts at three firms, namely Scotiabank, Societe Generale, and Howard Weil simultaneously upgraded the stock to ‘Sector Perform’ from ‘Underperform’.
Even though everything from hedge funds’ sentiment to the Quebec government’s aid package and analysts’ optimism seems to be going in favor of the stock, with one of its largest shareholders reducing its stake considerably, we believe that investors who find the stock attractive at the current valuations must exercise some caution before committing a large amount of capital to it.