Value-Oriented Corsair Capital Comments on Strong Q2, 5 Key Positions

Corsair Capital Management L.P., run by co-portfolio managers Jay Petschek and Steven Major, operates as a value-oriented, event-driven, long/short equity investment firm. The asset manager predominantly focuses on small- to mid-cap companies in the United States and Canada which are undergoing strategic or structural changes and thus have impending catalysts. The two portfolio managers have decades of experience as value investors, with their investment philosophy paying off quite handsomely over the years. Corsair Capital has generated a compounded net annual return of 12.6% since its inception in January 1991, outpacing the 9.8% mark generated by the S&P 500 Index over the same time span. Meanwhile, Corsair Capital delivered a net-of-fees return of 1.3% for the second quarter of this year, bringing the investment firm’s return for the first half of 2016 above water to 0.6%.

In a fresh quarterly letter to investors, New York-based Corsair Capital Management L.P. offered a rather interesting and unique explanation as for why U.S. equities keep going higher despite mounting economic uncertainty and a continued slump in corporate profit. The asset management firm ascribes the positive performance of U.S. equities to the low interest rate environment, stating:

“The U.S. stock market is currently trading at approximately 16x-17x next year’s earnings. This equates to an earning’s yield of approximately 6% after-tax and 8% on a pre-tax basis – a big gap to 10-year treasury bonds yielding just 1.5%. As long as investors believe that stocks will generally continue to earn what they currently do (even with zero growth), equities will seem to be mathematically quite cheap compared to bonds. Of course, just because bonds are expensive doesn’t mean investors have to invest in stocks. However, if not stocks, where will investors turn? It just seems the answer is TINA – there is no alternative – as all assets are historically expensive and stocks may prove to be the proverbial ‘best house in a lousy neighborhood.”

Without further ado, let’s have a look at several equity positions Corsair Capital discussed in its quarterly letter to investors.

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Jay Petschek - Corsair Capital

Diamond Resorts International Inc. (NYSE:DRII)

 – Shares Owned by Corsair Capital Management (as of March 31): 842,577

 – Value of Corsair Capital Management’s Holding (as of March 31): $20.48 Million

Corsair Capital Management L.P. upped its position in Diamond Resorts International Inc. (NYSE:DRII) by 574,302 shares during the first three months of 2016, ending the March quarter with 842,577 shares. The increased position was valued at $20.48 million and accounted for 2.8% of the value of the hedge fund’s equity portfolio. Diamond Resorts announced in late-February that it was working with an investment bank on strategic alternatives and in late-June, the operator of timeshare properties agreed to be bought by private equity firm Apollo Global Management LLC for approximately $2.2 billion. According to the aforementioned letter to investors, Corsair Capital “made DRII a core position after management announced it was pursuing strategic alternatives and we continued to add throughout Q2 as DRII continued to execute”. The New York-based firm run by Messrs. Petschek (pictured above) and Major believed the timeshare resort company “would be an ideal takeout candidate for either a strategic buyer or PE buyer”, thanks to “its low financial leverage and limited capex requirements”. Diamond Resorts shares are up by 16% thus far in 2016. Ken Griffin’s Citadel Advisors LLC owned 1.74 million shares of Diamond Resorts International Inc. (NYSE:DRII) at the end of March.

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Olin Corporation (NYSE:OLN)

 – Shares Owned by Corsair Capital Management (as of March 31): 1.10 Million

 – Value of Corsair Capital Management’s Holding (as of March 31): $19.06 Million

The value-oriented equity investment firm trimmed its stake in Olin Corporation (NYSE:OLN) by 26% during the first quarter to 1.10 million shares worth $19.06 million on March 31. The shares of the manufacturer of chlor alkali products gained 43% in the second quarter and are up by 20% year-to-date. Olin shares are 14% in the red in the past month however, as the company cut its second quarter and full-year guidance amid weak domestic caustic soda demand and falling chlorinated organic sales. However, Corsair Capital believes that “improving supply/demand dynamics in the chlor-alkali market will be a tailwind for OLN” and that the chemical maker “will over-deliver on synergies from its acquisition of Dow’s chlor-alkali assets”. In October 2015, Olin successfully consummated the acquisition of Dow Chemical Co (NYSE:DOW)’s U.S. chlor alkali and vinyl, global chlorinated organics, and global epoxy businesses. Seth Klarman’s Baupost Group LLC had 10.74 million shares of Olin Corporation (NYSE:OLN) among its holdings at the end of the first quarter.

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Let’s head to the second page of this article, where we will lay out Corsair Capital’s comments on three other prominent positions.

Clearwater Paper Corp (NYSE:CLW)

 – Shares Owned by Corsair Capital Management (as of March 31): 293,363

 – Value of Corsair Capital Management’s Holding (as of March 31): $14.23 Million

Corsair Capital reduced the size of its Clearwater Paper Corp (NYSE:CLW) position by 11% during the March quarter, to 293,363 shares. The reshuffled stake was valued at $14.23 million at the end of the first quarter. The manufacturer of consumer tissue, away-from-home tissue, parent roll tissue, bleached paperboard, and pulp has seen the value of its stock gain 35% in 2016. The company’s second quarter net sales decreased by $7.9 million year-over-year to $436.67 million, reflecting lower average paperboard net selling prices driven by an unfavorable mix shift and a decrease in paperboard shipments due to increased competition in the domestic market. Corsair Capital believes that the recent appointments of John O’Donnell and Alex Toeldte, both activist CEOs, to Clearwater Paper’s Board of Directors will “add more value creators to the CLW team”. Royce & Associates, founded by Chuck Royce, was the equity holder of 194,500 shares of Clearwater Paper Corp (NYSE:CLW) at the end of the March quarter.

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IAC/InterActiveCorp (NASDAQ:IAC)

 – Shares Owned by Corsair Capital Management (as of March 31): 535,456

 – Value of Corsair Capital Management’s Holding (as of March 31): $25.21 Million

Corsair Capital Management L.P. owned 535,456 shares of IAC/InterActiveCorp (NASDAQ:IAC) at the end of the first quarter, 100,557 shares more than it did at the end of the final quarter of 2015. The upped position was worth $25.21 million, and constituted 3.5% of the value of the asset manager’s equity portfolio. The media and internet company operates a portfolio of well-known brands and products such as HomeAdvisor, Vimeo, About.com, Dictionary.com, The Daily Beast, Investopedia, and Match Group’s online dating portfolio. For HomeAdvisor alone, the company’s management team recently outlined a path to growing revenue from $355 million in 2015 to over $1 billion in 2020. IAC’S CEO Joey Levin recently released a detailed letter to shareholders to lessen skepticism concerning HomeAdvisor’s long-term potential, a letter viewed as “extraordinary” by Corsair Capital. Moreover, IAC repurchased roughly 6% of its outstanding shares on the open market in the first quarter, a move which, along with the aforementioned letter, was considered by Corsair Capital as a “significant inflection point for the company”. IAC shares are 15% in the green year-to-date. Christian Leone’s Luxor Capital Group owned 3.03 million shares of IAC/InterActiveCorp (NASDAQ:IAC) at the end of the first quarter.

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Voya Financial Inc. (NYSE:VOYA)

 – Shares Owned by Corsair Capital Management (as of March 31): 1.06 Million

 – Value of Corsair Capital Management’s Holding (as of March 31): $31.44 Million

Voya Financial Inc. (NYSE:VOYA) was the fifth-largest position in Corsair Capital Management’s pool of holdings at the end of the first quarter after the New York-based asset manager cut its Voya stake by 3% during the quarter to 1.06 million shares valued at $31.44 million. The retirement, investment and insurance company, which serves as a custodian for various retirement and 401(k) programs among other things, has been weighed down by the continued low interest rate environment, what with it being difficult for Voya Financial to manufacture products that are attractive to customers and profitable at the same time. Corsair Capital believes “the current rate environment represents a manageable headwind that will not require an infusion of capital, just less excess capital available to return to shareholders”. Moreover, the value-oriented investment firm thinks “VOYA will actively repurchase shares of the company at these levels, creating even further value in the long-term”. Adam Usdan’s Trellus Management Company acquired a new stake of 42,600 shares of Voya Financial Inc. (NYSE:VOYA) during the June quarter.

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