Meanwhile, Marcato Capital’s founder, said that Virtus Investment Partners Inc (NASDAQ:VRTS), which closed Thursday at nearly $101 per share, may soar to $224 per share in two to three years, through a combination of value unlocking measures such as returning capital to investors. McGuire’s main thesis about the stock and its potential to grow is that its balance sheet is misunderstood. The company, which is trading at six times earnings, has a market capitalization of about $1 billion and an enterprise value of $480 million. Net inflows and performance equally account for the firm’s 15% asset under management compound annual growth rate, he said.
The main culprit of Virtus’ undervaluation by the market, according to McGuire, is that cash flow from operations is skewed, combined with some reputation concerns. Operating cash flow is skewed because of the company seeding its own capital in a program called the accelerate seed program, which is funded by $100 million in issuance and free cash flow. Adjusted, the firm has $115 million in cash flow, he said. The reputation concerns come from Virtus’ “AlphaSector Fund”, which uses backtested returns for marketing. Outflows from the “AlphaSector Fund” have negatively impacted the net inflows and outflows figure and McGuire expects concerns to vanish by the end of the first quarter of 2016.
According to our data, hedge funds were also bullish on Virtus Investment Partners Inc (NASDAQ:VRTS) in the second quarter, as they amassed some 12% of the firm’s outstanding stock at the end of June. The total value of holdings went up by 22% during the quarter to $143.16 million. There were 13 hedge funds long on the stock at the end of June, two more than at the end of March. Interestingly, Marcato Capital did not report a stake in Virtus in its latest 13F. Joe Huber’s Huber Capital Management was the largest shareholder among the funds we track, holding 371,353 shares, up by 54% over the quarter.