The Latest on Engaged Capital’s Positions, Performance, and Activist Campaigns

Glenn W. Welling‘s activist hedge fund Engaged Capital recently released its 2016 second quarter letter to investors, revealing the performance of its flagship fund during the second quarter and first-half of 2016. Unlike most hedge funds, which saw severe drawdowns during the first quarter, the Engaged Capital Flagship Master Fund LP ended the period with gains. However, it lost 3.22% during the second quarter, which pushed its first-half net return to negative 0.49%.

According to Engaged Capital’s 13F filing for the June 30 reporting period, its U.S. equity portfolio was worth $284.02 million at the end of June and consisted of long positions in only 11 stocks. The filing also revealed that during the second quarter, the fund had a quarterly turnover rate of a mere 9%, having reduced the size of two of its holdings, adding shares to two of its positions, and selling out of one stock entirely. In this article, we’ll take a look at Engaged Capital’s five prominent equity holdings and discuss their performance so far in 2016.

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#5 Jamba, Inc. (NASDAQ:JMBA)

– Shares Owned by Engaged Capital (as of June 30): 1.83 Million

– Value of Holding (as of June 30): $18.84 Million

Let’s start with Jamba, Inc. (NASDAQ:JMBA), which dropped two spots in Engaged Capital’s equity portfolio during the second quarter to rank as its sixth-largest equity holding at the end of June. In its second quarter letter, Engaged Capital mentioned that the company’s present valuation doesn’t reflect its true value and suggested that the stock can see meaningful upside if the company focuses more on its refranchising efforts and undertakes cost cutting measures. Engaged Capital also thinks that Jamba, Inc. (NASDAQ:JMBA) should sell its loss-making stores in New York and refranchise its company-owned outlets at various other locations. Jamba’s stock has been on a downward trajectory since last April and in spite of the gains it has registered this month, it is still trading down by 17.52% year-to-date. In a regulatory filing submitted on August 10,  Engaged Capital revealed that it has further upped its stake in Jamba, with it now owning 2.09 million shares of the company. Jamie Mendola‘s Pacific Grove Capital increased its holding in the company by 28% to 1.24 million shares during the April-to-June period.

#4 Medifast Inc (NYSE:MED)

– Shares Owned by Engaged Capital (as of June 30): 737,465

– Value of Holding (as of June 30): $24.53 Million

Though Engaged Capital didn’t alter its stake in Medifast Inc (NYSE:MED) during the second quarter, the value of the fund’s holding in the company increased by $2.27 million due to a 10.2% rise in Medifast’s stock during the period. The shares have continued their uptrend in the third quarter as well and are currently trading up by 20% year-to-date. Along with Jamba, Mr. Welling also sits on the Board of Medifast Inc. Engaged Capital likes the valuation of the company at current levels, however it also advocates that if the company is not able to create significant value for shareholders going forward, it must explore other strategic alternatives like going private. The fund thinks that Medifast Inc (NYSE:MED)’s “overcapitalized balance sheet also provides downside protection and capital allocation flexibility.” For its second quarter, Medifast reported EPS of $0.63 on revenue of $71.14 million versus analysts’ expectations of EPS of $0.51 on revenue of $72.01 million. Billionaire Ken Griffin‘s Citadel Investment Group initiated a stake in Medifast during the second quarter, purchasing 17,828 shares of the company.

We’ll discuss three more of Engaged Capital’s top picks on the second page of this article.

#3 Rovi Corporation (NASDAQ:ROVI)

– Shares Owned by Engaged Capital (as of June 30): 2.45 Million

– Value of Holding (as of June 30): $38.32 Million

Rovi Corporation (NASDAQ:ROVI) was the only stock among Engaged Capital’s seven-largest equity holdings in which the fund increased its stake during the second quarter, by 200,000 shares. The fund revealed in its latest investor letter that Rovi’s current valuation doesn’t include “any impact from license renewals with two large customers who currently do not pay license fees.” The fund wants the company to not engage in any “value destructive” M&A, manage its cash in order to facilitate a share buyback program and reduce its costs “by stopping inefficient R&D spend and reducing corporate overheads.” Engaged Capital thinks that once these issues are sorted out, Rovi Corporation (NASDAQ:ROVI) should “re-present” itself to investors with a “clear long-term value proposition,” and augment its Board with “new directors with capital allocation/operating efficiency expertise.” Rovi Corporation’s stock saw a large spike in February after the company reported its fourth quarter earnings. Although the stock gave up all of those gains over the next few months, it has again seen a decent rally in the last two months and is currently trading up by 26.78% year-to-date. On August 28, analysts at B. Riley reiterated their ‘Buy’ rating and $31 price target on the stock.

#2 Benchmark Electronics, Inc. (NYSE:BHE)

– Shares Owned by Engaged Capital (as of June 30): 2.43 Million

– Value of Holding (as of June 30): $51.36 Million

Moving on, Engaged Capital kept its stake in Benchmark Electronics, Inc. (NYSE:BHE) unchanged during the second quarter. Shares of the Texas-based electronics equipment manufacturer have registered solid gains in the last couple of months and are currently trading up by over 16% year-to-date. According to analysts who track the company, Benchmark Electronics, Inc. (NYSE:BHE)’s stock could see further upside from here, as the market has yet to price in the company’s on-going transition to higher-value markets. Some analysts also think that downside in the stock is protected at current levels due to the company’s incrementally stable cash flows, strong balance sheet and a highly variable cost structure. Analysts are expecting the company to report EPS of $0.35 on revenue of $584.17 million for the third quarter. For the same quarter of the previous year, Benchmark Electronics pulled in EPS of $0.41 on revenue of $630.19 million. Hedge funds that initiated a stake in the company during the second quarter included Joshua Packwood and Schuster Tanger’s Radix Partners and David Brown‘s Hawk Ridge Management.

#1 Outerwall Inc (NASDAQ:OUTR)

– Shares Owned by Engaged Capital (as of June 30): 2.43 Million

– Value of Holding (as of June 30): $102.11 Million

Outerwall Inc (NASDAQ:OUTR) continued to remain Engaged Capital’s largest equity holding at the end of the second quarter. While the fund didn’t make any change to its stake in the company during the period, the 13.5% rise in Outerwall Inc (NASDAQ:OUTR)’s stock pushed up the value of its holding in the company by over $12 million. On July 25, Outerwall announced that it will be acquired by affiliates of Apollo Global Management (NYSE:APO) for $52 per share, following which its stock spiked very close to that $52 mark. Outerwall and Apollo Global Management (NYSE:APO)  expect the deal to be completed by the end of the third quarter. In its investor letter, Engaged Capital mentioned that the fund was persuading the company to sell itself during the second quarter and that if Outerwall would have refused to do so, the fund would have asked it to “institute a large dividend to force the market to value OUTR’s sizable cash flows.” Billionaire Jim Simons‘ Renaissance Technologies upped its stake in Outerwall by 45% to 465,900 shares during the second quarter.

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