This Hedge Fund’s #1 Pick Quadrupled! Now Check Out Its Other Stock Picks

Prescott Group Capital Management is a hedge fund located in Tulsa, Oklahoma. The firm was founded in 1992 and manages 13F holdings with a value of more than $468 million as of September 30th. Healthcare and service industries are the largest allocation of the fund. It mainly invests in small and mid-cap stocks. Phil Frohlich who founded this firm has an economics degree from University of Oklahoma, an MBA from University of Texas at Austin and a law degree from University of Tulsa. Prescott’s holdings are diversified across different sectors. In the article below, we describe the top 5 holdings of the fund all of which are small cap stocks with a market capitalization of less than $1 billion.

Hedge fund sentiment is an important metric for assessing long-term profitability. At Insider Monkey, we track over 700 hedge funds, whose quarterly 13F filings we analyze to determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (read more details here).

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Air Transport Services Group Inc. (NASDAQ:ATSG) is the top holding of Prescott Group holding 4 million shares with a total  value of $59 million, forming 12.6% of the total portfolio value as of September 30th. This is actually a top long-term holding in Prescott’s portfolio. It was the second largest holding during the fourth quarter of 2012 and has since been the top stock in Frohlich’s portfolio. The stock was trading at $4.25 at the end of 2012 and quadrupled in value as a #1 pick in this small hedge fund’s portfolio.

Air Transport Services Group provides airline operations, aircraft leases, aircraft maintenance and other support services primarily to the cargo transportation and package delivery industries. The stock has given a very good return of ~32% to shareholders over the period of last one year and has a total market value of $773 million. Air Transport Services Group (NASDAQ:ATSG) signed an agreement with Amazon Inc. (NASDAQ:AMZN) to operate an air cargo network. The agreements included leasing 20 Boeing 767s to Amazon, being the planes operated by ATSG’s airlines, ABX Air and Air Transport International. Out of the 6 analysts covering this stock 3 have rated it as a hold while 3 have rated it is a buy. As per our records, about 18 hedge funds held shares worth $257 million accounting for 35% of the company’s float as of September 30th.

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Nature’s Sunshine Prod. (NASDAQ:NATR) is engaged in the manufacturing and direct selling of nutritional and personal care products. Prescott Group holds more than $29 million with 1.86 million of this company’s shares which makes it a major stakeholder. The company has a market value of around $220 million. This stock is currently trading near the middle of its 52 week price range and has given a return of ~12% to shareholders year to date. The company is led by Gregory L. Probert who is both the Executive Chairman and CEO. The stock has a trailing P/E of ~21x with a P/B ratio of 1.66. The company has a high payout ratio of 71% leading to a healthy dividend yield of 3.3%. Nature’s Sunshine Prod. (NASDAQ:NATR) reported revenues of $324 million and net income of $14.7 million in 2015. The number of hedge funds from our system having a position in this stock increased to 5 during the third quarter from 4 at the end of second quarter. The value of their holdings increased by more than 69% to $110 million quarter over quarter.

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PharmAthene, Inc. (NYSEMKT:PIP) is a unique company as it develops medical counter measures against biological and chemical threats. This stock is the 3rd largest holding for Prescott Group Capital Management with 7.9 million shares worth $23 million at the end of the third quarter 2016. The Company’s main products are anthrax vaccines and bioscavengers, which are used in treatment of nerve agent poisoning.  This “biodefense” company with a market capitalization of ~$180 million has given a return of more than ~63% in the last one year. The stock is currently trading near its 52 week high price. Prescott Capital is the largest owner of the company’s shares, holding more than 12% of the company’s stock. PharmAthene, Inc. (NYSEMKT:PIP) recently received payments of $90 million from SIGA Technologies in September as part of a legal settlement. Approximately 22% of the company’s outstanding stock as of September 30th was held by 6 funds as per our database.

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Enova International Inc. (NYSE:ENVA) is another small cap stock in which Prescott Capital has a major stake. The fund held 1.9 million shares with a total  value of $18.8 million, forming 12.6% of the total portfolio value by the end of the third quarter. This company provides online financial services to non-prime consumers and small businesses. It has a consumer base of over 4 million around the globe. The stock’s recent performance has been poor, losing over ~31% of its value in the last one year. The stock’s valuation is low with a P/B ratio of 0.45x and a trailing P/E ratio of 10x. The company reported $165 million in revenues during the third quarter which was a growth of 18.6% over the last one year. It maintained a robust gross margin of 51.3% with an EPS of 23 cents/share. The company expects full year revenues to be in the range of $728-748 million. Out of the 5 analysts covering the stock, 3 analysts have rated it as a hold while 2 have rated it as a buy. The value of hedge fund holding in this stock increased to $74.7 million in the third quarter from $46.8 million in the quarter earlier. However the number of funds holding this stock also increased to 21 from 18 quarter over quarter.

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Servicesource International Inc. (NASDAQ:SREV) is an IT company which is present in two segments: Managed Services and Cloud and Business Intelligence (CBI). Prescott Group owned more than $17 million of this company’s stock comprising of 3.6 million shares at the end of the third quarter. Institutions own more than 90% of the company’s ~85 million shares which has a current market value ~$378 million. The stock has under performed the broad stock market indices, losing ~2% year to date. Out of the 3 analysts, two analysts have rated it as a “buy” while one has rated it as “underweight”. The company recently opened a new global revenue delivery center in Sofia, Bulgaria. The stock is currently trading at a trailing P/S ratio of 1.57 and a P/B ratio of 2.96. Servicesource International Inc. (NASDAQ:SREV) reported revenues of $246 million in the last 12 months. By the end of September, 12 funds held shares worth $144.8 million of this stock as per our records.

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