Why Are Hedge Funds Selling Shares Of Comverse Inc. (CNSI), EMCORE Corporation (EMKR)?

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In a 13D filing with the Securities and Exchange Commission, Jeffrey Bronchick’s Cove Street Capital reported reducing its stake in Comverse Inc. (NASDAQ:CNSI) by 344,400 shares over the last 60 days. Therefore, the investment firm currently holds a 1.17 million-share position in the digital services company, accounting for 5.4% of its outstanding common stock. In a separate 13D  filed with the SEC, Becker Drapkin Management, founded by Matthew Drapkin and Steven R. Becker, reported selling 137,972 shares of EMCORE Corporation (NASDAQ:EMKR) since the fund last filed a 13D regarding the company’s shares, on August 12, 2015. As a result, Becker Drapkin Management currently owns nearly 2.18 million shares of EMCORE, which represent 8.5% of the company’s outstanding common stock. Even more to that, the investment firm entered into a Stock Purchase Plans agreement with Tourmaline Partners, which stipulate that the latter can purchase shares of EMCORE from September 30 to December 15, 2015.

Matthew Drapkin - Becker Drapkin Management

Why do we track the hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect the hedge funds’ activities. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small cap stock picks among hedge funds also bested passive index funds by around 60 percentage points over the 36 month period beginning in September 2012 (read the details here).

Jeffrey Bronchick’s Cove Street Capital is a hedge fund that defines itself as a classic type of value investor, similar to the investing styles of Ben Graham and Warren Buffett. The investment management firm provides value-based investment strategies to its client-partners in an attempt to benefit from inefficiencies in the public markets. Cove Street Capital manages a public equity portfolio worth $829.77 million as of June 30, while the fund’s top ten holdings account for 37.39% of its entire portfolio.

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Comverse Inc. (NASDAQ:CNSI) is a technology company that provides cloud-based and in-network services enablement and monetization software solutions for communication service providers and enterprises. Cove Street Capital’s 13D filing on May 6 specified that the investment firm believed that the company was an attractive investment opportunity at the time. That filing also indicated Cove Street Capital’s intentions to engage in a constructive dialogue with the company’s representatives concerning its markets, operations, competitors, and prospects, among other things. So the recent sell-off might indeed come as a surprise to many of us, considering that the shares of Comverse have lost nearly 25% since May 6. It might be the case that the investment opportunity did not turn out to be as attractive as initially assumed, so the investment firm is aiming to cut its losses from this unsuccessful bet. At the beginning of August, Comverse announced the completion of its acquisition of Acision, a privately-held leader in secure mobile messaging and engagement services. The equity interests in Acision were acquired for $136 million in cash, 3.14 million shares of Comverse, and potential earnout payments of up to $35 million. The two companies are set to merge their complementary technologies and solutions portfolios to create an evolutionary platform for rapid service creation opportunities, which will strengthen the company’s position in the highly profitable monetization services market. Brett Hendrickson’s Nokomis Capital is among the largest equity holders in Comverse Inc. (NASDAQ:CNSI) within our database, holding a stake of 437,909 shares.

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