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This Small Illinois-Based Hedge Fund Outperformed Several Large Peers in Q1

Central Square Management is an Illinois-based long/short equity hedge fund founded by Kelly Cardwell in 2007. Mr. Cardwell holds a B.S. in Finance from Bradley University and prior to founding Central Square Management, worked at Fidelity Investments for 10 years. Though Central Square is quite small in terms of assets under management compared to more well-known hedge funds, its stock picks have performed much better than many of those larger peers in 2016. Insider Monkey’s analysis of the fund’s 13F holdings in companies worth at least $1 billion shows that its ten long positions generated weight average returns of 15.5% during the first quarter. In comparison, despite seeing a strong rally in the second-half of the quarter, the broader market managed to the end the quarter with only marginal gains, while the hedge fund industry as a whole was down slightly for the quarter. Considering Central Square’s great performance in the January-to-March period, in this article we are going to examine two of its top performing stock picks as well its top three equity holdings as of the end of 2015.

We track prominent investors and hedge funds 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 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

Kelly Cardwell
Kelly Cardwell
Central Square Management

Let’s start with Canada-based gold mining company Goldcorp Inc. (USA) (NYSE:GG), in which Central Square Management initiated a stake during the fourth quarter of 2014. The fund increased its position in the company significantly during the following two quarters, but grew less bullish on it during the second-half of 2015, reducing its stake by 45% in the third quarter and then by another and 89% during the fourth quarter. Those moves cut its holding to 43,540 shares of Goldcorp Inc. (USA) (NYSE:GG) worth $503,000 on December 31. The hefty cut to the position in the fourth quarter is surely a disappointment in hindsight, given that shares of Goldcorp ended the first quarter up by 41% thanks to a rally in gold prices. David Garofalo, who will be assuming the role of president and CEO of Goldcorp this month, said in a recent interview that the company is preparing for a low-to-negative growth environment in gold production, which he described as the new normal for the industry. He also revealed that Goldcorp Inc. (USA) (NYSE:GG) is trying to de-risk its business by seeding gold exploration companies instead of investing its own resources in exploration. Billionaire Israel Englander‘s Millennium Management also reduced its stake in Goldcorp during the fourth quarter, trimming its holding by 29% to 7 million shares.

Yamana Gold Inc. (USA) (NYSE:AUY) is another gold mining stock in which Central Square Management reduced its stake substantially during the fourth quarter and which has performed very well this year. The fund initiated its stake in Yamana Gold Inc. (USA) (NYSE:AUY) during the third quarter of 2015, but reduced it by more than half during the fourth quarter, leaving it with 560,000 shares worth $1.04 million as of December 31. Though shares of Yamana Gold appreciated by 63.7% during the first quarter, they are still trading down by 85% from their late-2012 highs. For its first quarter of fiscal year 2016, analysts are expecting the company to report a loss of $0.01 per share on revenue of $426.10 million, which would represent a bottom line improvement coupled with a top line contraction of about 7% year-over-year. On March 14, analysts at Raymond James upgraded the stock to ‘Outperform’ from ‘Market Perform’. Jim Simons‘ Renaissance Technologies initiated a stake in Yamana Gold Inc. (USA) (NYSE:AUY) during the fourth quarter, purchasing 2.2 million shares of the company.

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We delve into the fund’s top three holdings as of December 31 and check out their performance on the next page.

Though Central Square Management reduced its stake in Silver Wheaton Corp. (USA) (NYSE:SLW) by 41% to 431,148 shares during the fourth quarter, the company still ended up being the fund’s third-largest equity going into 2016. Shares of Silver Wheaton Corp. (USA) (NYSE:SLW) appreciated by 34% during the first quarter, but have fallen by over 10% in the last three trading sessions after the company announced a secondary public offering. While Silver Wheaton Corp. (USA) (NYSE:SLW) had initially planned to sell slightly more than 30 million shares at $16.60 per share to raise $500 million, on March 31 it increased the size of its public offering to 33.14 million shares at the same price in order to raise $550 million. According to the company’s press release, it plans to use the proceeds from the offering to repay a line of credit drawn in November for its $900 million purchase of future silver production at the Antamina mine in Peru. While analysts acknowledged that the company has made a smart move by going for a public offering when its stock has appreciated significantly, they also expressed concern over the increase in size of the public offering, which will further dilute existing shareholders’ equity and which could suggest that the company doesn’t have ample liquidity.

Moving on,  Tandy Leather Factory, Inc. (NASDAQ:TLF) is one of Central Square Management’s oldest investments, as the fund initiated a stake in the company during the fourth quarter of 2010. During the fourth quarter of 2015, it reduced its stake in Tandy Leather Factory, Inc. (NASDAQ:TLF) marginally, by 2% to 742,307 shares worth $5.45 million as of December 31. The fund trailed only Gregory Bylinsky and Jefferson Gramm’s Bandera Partners as Tandy Leather Factory, Inc. (NASDAQ:TLF)’s largest shareholder in our database at the end of December. Shares of Tandy Leather have largely been range-bound this year and currently trade almost flat year-to-date. On March 11, the company reported its fourth quarter earnings, declaring EPS of $0.24 on revenue of $24.20 million. For the same quarter of the previous year, the company delivered nearly identical results: EPS of $0.24 on revenue of $24.47 million.

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PICO Holdings Inc (NASDAQ:PICO) has been Central Square Management’s largest equity holding since the third quarter of 2014, when the fund initiated a stake in the company and launched its activist campaign against it. Amid a 6.6% rise in PICO Holdings Inc (NASDAQ:PICO)’s stock during the fourth quarter, Central Square Management reduced its stake in the company by 6% to 1.24 million shares worth $12.82 million on December 31. However, according to a recent regulatory filing from the fund, it has increased its stake in the company to 14.1 million shares through March 18, or nearly 6.1% of the outstanding shares of PICO Holdings Inc (NASDAQ:PICO). The filing also revealed that the fund has reached an agreement with PICO Holdings under which the company will increase the size of its Board to nine members from seven and appoint Andrew F. Cates as a Class III Director and Daniel B. Silvers as a Class I Director to occupy the newly-created positions. With ownership of over 1.4 million shares of the company, Chuck Royce‘s Royce & Associates was the largest shareholder of the company in our database at the end of December.

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Disclosure: None