Michael Blitzer’s Kingstown Capital Management is a value-oriented investment hedge fund which focuses mainly on special situation securities to generate profit. Based on the fund’s latest 13F filed with the SEC, the firm has a public equity portfolio valued at $768.46 million. The fund’s activities during the quarter included two new purchases, while its investment portfolio showed that it invested mainly in finance and consumer discretionary stocks, which accounted for 38% and 19% of its public portfolio respectively. Out of the hedge funds that we monitor, our experts picked its top small-cap stocks to study, namely McDermott International (NYSE:MDR), Ocwen Financial Corporation (NYSE:OCN), and Aerojet Rocketdyne Holdings Inc (NYSE:GY).
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However, we don’t just track the latest moves of funds. We are, in fact, more interested in their 13F filings, which we use to determine the top 15 small-cap stocks held by the funds we track. We gather and share this information based on 16 years of research, with backtests for the period between 1999 and 2012 and forward testing for the last 2.5 years. The results of our analysis show that these 15 most popular small-cap picks have a great potential to outperform the market, beating the S&P 500 Total Return Index by nearly one percentage point per month in backtests. Moreover, since the beginning of forward testing in August 2012, the strategy worked brilliantly, outperforming the market every year and returning 142%, which is more than 83 percentage points higher than the returns of the S&P 500 ETF (SPY) (see more details).
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The first of Kingstown Capital Management’s top small-cap picks that we are going to look at is Ocwen Financial Corp (NYSE:OCN), in which Kingstown Capital Management bought 12.0 million shares of during the first quarter, valued at $99.00 million, a new position for the fund and instantly vaulting it to the top of the fund’s overall portfolio. A review of whether Ocwen Financial Corp (NYSE:OCN)’s mortgage servicing complies with federal and state laws will be starting after the selection of an auditor. Fidelity Information services will look into allegations of whether the company abused foreclosures laws or not. Fidelity will also examine whether Ocwen Financial Corp (NYSE:OCN) complied with the 2012 Homeowner Bill of Rights and California Residential Mortgage Lending Act as part of the investigation. The company’s practices as well as staffing levels will be evaluated to identify areas of weakness that could undermine the company’s ability to operate under the law. The company has already paid a fine of $2.5 million for failing to provide authorities with its loan file information. These legal troubles have led to shares declining by over 71% during the past year. Nonetheless, Seth Klarman’s Baupost Group holds 7.83 million shares worth $64.63 million.
Next up is Aerojet Rocketdyne Holdings Inc (NYSE:GY), in which Kingstown Capital Management owned 3.20 million shares valued at $74.20 million. The company has signed a Space Act agreement with NASA Stennis Space Center, which covers a test service and test stand support for its AR1 multi-element engine that is currently in development, as well as the main injector. On completion, the AR1 engine is to be used to replace the Russian-made RD-180 engines that power the Atlas V launch vehicle. The engines should be ready for use in 2019 and are expected to end the U.S’ dependence on Russian-made engines. Mario Gabelli of GAMCO Investors holds 5.28 million shares of Aerojet Rocketdyne Holdings Inc (NYSE:GY) valued at $122.46 million.
Lastly is McDermott International (NYSE:MDR), in which the fund holds 4.0 million shares worth $59.36 million, the position being unchanged during the first quarter. A look at the stock’s performance shows that its value has increased by 134.96% over the past six months and by just under 100% this year. The company won its fourth Ayatsil field contract after being awarded an offshore contract by Petroleos Mexicanos (PEMEX). The contract entails the procurement, construction, installation, and commissioning of the Ayatsil-C replacement jacket. The latest contract comes on the successful completion of the Ayatsil-B drilling platform last year. Slated for completion in the fourth quarter of 2016, the facility will weigh approximately 14,800 tons. McDermott plans to use its in-house engineering and procurement experts for the project as it moves to provide PEMEX with a lower cost solution based on global quality and safety standards. PEMEX has already reiterated plans to develop the Ayatsil field with four platforms as it moves to drill 43 wells in the area. Youlia Miteva’s Proxima Capital Management holds 6.22 million shares worth $23.90 million in McDermott International (NYSE:MDR), also benefiting greatly from its superb 2015.
Disclosure: None
