In this piece, we will take a look at the Top 10 Holdings of Engaged Capital.

Engaged Capital was one of the hedge funds that roared back to life as activist investors enjoyed one of the best runs in the market. With the S&P 500 rallying by 24% in 2023, the hedge fund found itself in one of the best spots owing to savvy stock picking. A 29% gain by the hedge was much better than the average 16% loss registered by most hedge funds in 2022 as the market came under pressure amid heightened inflation.

Founded in 2012 by veteran investor Glenn W. Welling, Engaged Capital is one of the most revered activist hedge funds that push for strategic changes in companies. Having launched with an initial capital of $85 million, it has become one of the biggest, controlling a portfolio worth $617.1 million. It has grown to become an experienced small-cap hedge fund that makes investments with a two to five-year investment horizon.

Welling is best known for his stock picking skills, having accrued significant skills on starting his career at the renowned activist fund Relational Investors led by Ralph V Whitworth in 2008. He was the principal and managing director at the hedge fund responsible for consumer, healthcare, and utility group investments.

While the top 10 holdings of Engaged Capital are public equities with a market cap of $300 million to $8 billion, they are usually spread in specific industries. For instance, it is not fond of investment opportunities in commodity sectors such as utilities, energy, and financials. The hedge fund also avoids companies with two share classes and those with more than 20% insider ownership, as it makes pushing for successful activist campaigns challenging.

Engaged Capital primarily focuses on companies that excel in their industries, show strong profitability, produce solid cash inflows, and maintain a low debt ratio. The activist hedge fund investigates further to uncover the causes of the stock’s poor performance. It also examines the financial data to pinpoint areas needing improvement to alter how the market views the company and then discusses the company’s management structure to gauge the feelings of the shareholders, indicating if there’s interest among other investors in making changes.

As part of its activist campaigns, Engaged Capital always pushes for operational improvements, including cutting costs to generate optimum shareholder value. In some cases, it advocates for strategic reviews that include selling non-core assets or the entire business if it’s the only option left to generate value. Board refreshment, including pushing for seats on the board, is also part of the strategy that the hedge fund deploys to try and advocate for change and influence a company’s direction to unlock any hidden value.

Engaged Capital is not the only hedge fund pushing for changes in corporations in a bid to unlock shareholders in 2024. With activist investors generating an average return of 20.2% in 2023, there has been an inflow of Capital into various equities. Investors look for ways to unlock additional value when the equity market continues making higher highs amid the high interest rates environment.

Engaged Capital and other activists are expected to continue advocating for strategic changes as the high interest rate environment dampens expansion while affecting certain businesses. According to lawyers, bankers, and hedge fund executives, investors are expected to demand more from companies for transformation.

Some investors have expressed their readiness to invest additional funds as activists believe returns will continue to be strong with an increase in merger and acquisition activity. In the previous year, a record 77 first-time activists launched campaigns, a significant rise from 55 the previous year, according to Lazard data.

Our Methodology

Activist investment has roared back to life after the double-digit percentage gains in 2023 as the equity markets rallied to record highs. In this article, we have compiled the top 10 holdings of Engaged Capital, a hedge fund that is making a mark through activist investment. After analyzing Insider Monkey Database we have compiled Engaged Capital’s top ten holdings and ranked them based on the hedge fund’s equity stakes.

At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Top Holdings of Engaged Capital

10. Nevro Corp. (NYSE:NVRO)

Engaged Capital’s Equity Stakes: $27.23 Million

Number of Hedge Fund Holders: 29

Nevro Corp. (NYSE:NVRO) ranks among the top 10 holdings of Engaged Capital as one of the investments played in the healthcare sector. It operates as a medical device company focused on providing products for patients suffering from chronic pain.

According to the Insider Monkey database, 29 hedge fund portfolios held Nevro Corp. (NYSE: NVRO) at the end of the first quarter of 2024, up from 21 in the previous quarter. Armistice Capital is the most significant shareholder of the company, with shares worth $52.33 million.

Here is what Alger Weatherbie Specialized Growth Fund said about Nevro Corp. (NYSE:NVRO) in its first quarter 2024 investor letter:

“Nevro Corp. (NYSE:NVRO) provides spinal cord stimulation (SCS) devices in the U.S. and internationally for patients suffering from chronic pain. The global SCS market exceeds $2 billion and has been growing due to increased investment by the industry. During the quarter, the company preannounced fiscal fourth quarter results where revenues beat consensus estimates. Moreover, the company noted that while staffing issues and payer pressures continue to linger, the actual impact to procedure volumes appears to be declining. However, management noted that they remain cautious on the core SCS market, which still has a ways to go to get back to pre-pandemic levels. As such, shares detracted from performance.”

9. Portillos Inc (NASDAQ:PTLO)

Engaged Capital’s Equity Stakes: $28.22 Million

Number of Hedge Fund Holders: 21

Portillos Inc. (NASDAQ:PTLO) is the latest addition to Engaged Capital’s Portfolio, which operates as a quick-service dining franchise in the Chicago region. It is famous for authentic Chicago-style dishes such as hot dogs, Maxwell Street Polish, and Italian beef.

Engaged Capital acquired stakes in Portillos Inc. (NASDAQ:PTLO), shedding more than 50% in market value, making it a discounted investment play. The hedge fund acquired 1.99 million share valued at about $28.22 million, accounting for 4.57% of the portfolio. A total of 21 hedge funds in Insider Monkey’s database of 920 funds had stakes in Portillos Inc. (NASDAQ:PTLO), up from 19 in the preceding quarter.