Steelhead Partners Not Toying Around With Large Position in Toymaker JAKKS Pacific, Inc. (JAKK)

Michael Johnston of Steelhead Partners has opened a new position in JAKKS Pacific, Inc. (NASDAQ:JAKK) according to a recent 13G form filed with the SEC. The investor now holds 1.46 million shares of the $196.60 million multi-line, multi-brand company, the stake amassing 5.9% of JAKKS Pacific, Inc’s outstanding common shares.

Michael Johnston - Steelhead Partners

Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 144% over the ensuing 32 months, outperforming the S&P 500 Index by nearly 85 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.

Coming back to JAKKS Pacific, Inc. (NASDAQ:JAKK), the company recently signed a licensing agreement with Warner Bros Consumer Products which entails the manufacturing, distribution, and marketing of a line of products based on Warner Bros. Pictures and RatPac’s highly awaited Batman v Superman: Dawn of Justice Film. The film is directed by Zack Snyder and set for release in the spring of 2016. DC Comics releases are to be made available starting this fall as part of the deal. The licensing deal includes large-scale action figures for vehicles and accessories, among other things. The deal also covers domestic and international renewals for DC Comics’ franchise. Oasis Management Co Ltd has been very much active and bullish on Jakks Pacific Inc, with the insider buying 1.08 million shares at an average price of $6.90, lifting its total stake to 1.63 million shares.

Michael Johnston
Michael Johnston
Steelhead Partners

Out of 700+ active hedge funds that we track at Insider Monkey, the investment in JAKKS Pacific, Inc. (NASDAQ:JAKK) decreased during the first quarter, with 19 funds having invested $16.13 million in the company at the end of March compared to 18 funds with $23.18 million invested at the end of 2014. Michael Zimmerman’s Prentice Capital Management and Jim Simons’ Renaissance Technologies are two of the biggest stockholders of JAKKS Pacific, Inc in our database, with holdings of 419,405 shares and 341,214 shares respectively.

Let’s move on to Steelhead Partners’ top picks. The fund is bullish on materials, utilities & telecommunications, and energy stocks, with the top three positions of the fund being in Resolute Forest Products Inc (NYSE:RFP), Globalstar, Inc. (NYSEMKT:GSAT), and Level 3 Communications, Inc. (NYSE:LVLT). In Resolute Forest Products Inc (NYSE:RFP), the fund owns a stake of 11.93 million shares valued at $205.76 million. Resolute Forest Products Inc (NYSE:RFP) is forging ahead with its plans to build a state of the art manufacturing facility in Calhoun, Tennessee, which will be used to produce premium private label bath tissue and towel. CEO Richard Garneau affirms that the manufacturing facility is part of the company’s strategy to target growth synergies to delivering superior shareholder value. The project will cost the company $270 million and is aiming to produce over 60,000 metric tons of bath tissues and towels per year once at full capacity. Production should start in the first quarter of 2017. Prem Watsa‘s Fairfax Financial Holdings is a huge supporter of the company, with 35% exposure to the stock in its U.S public equity portfolio.

The second top holding of Steelhead Partners is in Globalstar, Inc. (NYSEMKT:GSAT), in which it owns 31.00 million shares valued at $103.25 million. Globalstar has partnered with Yippy for the construction of a ubiquitous global network that utilizes Yippy’s EASE 360 platform. The network should enable Globalstar consumers to remain connected to the internet even in regions where there are no cellular connections. As part of the agreement, Yippy will provide cloud data services using Globalstar, Inc. (NYSEMKT:GSAT)’s satellite network and devices. A secure connection is also guaranteed. Download and upload speeds will be enhanced with the new network, allowing consumers to maintain secure business operations while sending and receiving data. Data speeds should improve by up to 25x as a result of the new ground infrastructure. Billionaire James Dinan holds a slightly larger position in the company than Steelhead, of 31.47 million shares, the only investor we track that can say that.

Level 3 Communications, Inc. (NYSE:LVLT) was the third-largest holding of Steelhead Partners, which holds 1.43 million shares with a value of $77.12 million as of March 31. The company recently inked a deal with Optus Wholesale and Satellite that will allow it to grow its content delivery network by over 300% in Australia. As part of the deal, Optus is to store high-demand content on Level 3’s network. Optus Managing Director, Rob Parcell, plans to leverage the close working relationship with Level 3 Communications, Inc. (NYSE:LVLT) to improve the consumption of video, music, and data content on the internet. Optus customers stand to enjoy improved delivery completion rates and faster deliveries even during times of huge traffic on the network. Satellite and Optus Wholesale are also set to guarantee content delivery between their clients and end users in a way that elevates the end-user experience. Billionaire Mason Hawkins’ Southeastern Asset Management owns by far the largest-stake of Level 3 in our database, consisting of 45.24 million shares.

Disclosure: None