Becker Drapkin Management is an activist hedge fund led by Matthew Drapkin and Steven R. Becker. The fund is famous for an old school, Ben Graham-style, value-investing approach, as most of its $300 million in assets are invested into companies close to being net-nets (traded below the net asset value), in addition to often being poor performing companies in a transition phase. Such a strategy seems to be paying off nicely, as 11 companies in which the activist fund has acquired board seats have returned an average of 110%. Though past performance is not necessarily indicative of future performance, the fund still deserves respect and attention due to its unique ability to find deep value stocks and companies that have large net cash holdings on the balance, which is becoming increasingly harder to do. That’s because the standard screening for these type of shares is mostly useless, as investors pick them up in the blink of an eye now. Thus, Becker Drapkin and other value activists must be extremely creative, looking far beyond the horizons of now-standard investment thinking. In this article we take a closer look at how several interesting value positions like Par Petroleum Corporation (NYSEMKT:PARR), EMCORE Corporation (NASDAQ:EMKR) and Comverse Inc (NASDAQ:CNSI) are being handled by Becker Drapkin Management; and we will also highlight several key characteristics of the stocks, pointed out by Steven Kiel from Arquitos Capital Management during an episode of the NOL show (embedded on page 2), in an effort to understand why they were added to the portfolio of Becker Drapkin.
We don’t just track the latest moves of funds. We are, in fact, more interested in their 13F filings, which we use to determine the top 15 small-cap stocks held by the funds we track. We gather and share this information based on 16 years of research, with backtests for the period between 1999 and 2012 and forward testing for the last 2.5 years. The results of our analysis show that these 15 most popular small-cap picks have a great potential to outperform the market, beating the S&P 500 Total Return Index by nearly one percentage point per month in backtests. Moreover, since the beginning of forward testing in August 2012, the strategy worked brilliantly, outperforming the market every year and returning 135%, which is more than 80 percentage points higher than the returns of the S&P 500 ETF (SPY) (see more details).
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Following a substantial 39% cut in its ownership of Par Petroleum Corporation (NYSEMKT:PARR) during the first three months of the year, Becker Drapkin Management finished the first quarter with 321,796 shares on its balance sheet, worth $7.47 million. So far this year, Par Petroleum Corporation (NYSEMKT:PARR) is up by 14.22%. As Steven Kiel says, the interesting thing about the company is that it has around $1.4 billion of NOLs (Net Operating Losses) on the balance, which will not begin to expire until 2027, while its market cap is $683.23 million. The NOLs generally reduce the potential tax pressure on future profits, by deducting the outstanding amount from positive taxable income. Such huge gaps between long-term NOLs and the market cap are very rare, hard to find on the screeners, and typically require separate extensive research. The good thing about these stocks is that one can make almost sure money with little potential downside. Among the other prominent shareholders of Par Petroleum Corporation (NYSEMKT:PARR) one will find Andy Redleaf’s Whitebox Advisors, which held around 8.62 million shares valued at $160.00 million as of March 31.
EMCORE Corporation (NASDAQ:EMKR) is next on the list of potentially attractive value stocks, in which Becker Drapkin Management owned 3.20 million shares valued at $17.39 million. The fund kept the position unchanged over the course of the first quarter. EMCORE Corporation (NASDAQ:EMKR) is a $197.85 million company engaged in the production of semiconductor-based products. Besides having $458 million of NOLs that start to expire in 2021, it has $141 million in cash on the balance sheet, which is even rarer than in the previous example. Though the shares of this compnay appear rather attractive, Steven Kiel warns that potential investors should dig a bit deeper into the current operations of the company. Brett Hendrickson‘s Nokomis Capital reported owning around 2.31 million shares with a total market value of $12.54 million, which makes him the second-largest shareholder of EMCORE Corporation (NASDAQ:EMKR) in our database.
Lastly, Becker Drapkin’s stake in Comverse Inc (NASDAQ:CNSI) equaled 1.45 million shares, with a value of $28.52 million. Comverse Inc (NASDAQ:CNSI) might have appeared on the radar of Becker Drapkin and other value investors as it was a pure Graham-type net-net. As Steven Kiel noted in his review, recently the company closed the sale of its subsidiary and got a good chunk of cash, which would not appear on the balance sheet, and hence, most popular stock screeners, until September. Also, the company held some NOLs and according to Steven, the fair price of Comverse Inc (NASDAQ:CNSI) should be some $21.50. As of June 24, when he published his thoughts regarding the fair price estimates, the equity of Comverse Inc (NASDAQ:CNSI) traded around $20-21, providing a tiny margin of safety for investors. Since then, the price has slid even further to $18.70, making it even more attractive. However, in our opinion, potential investors should be careful regarding the fair price estimates, as Steven could have missed the effect of the latest $135 million acquisition of Acision, that would eat up a tangible portion of its free cash. Jeffrey Bronchick‘s Cove Street Capital followed Becker Drapkin Management in terms of size of ownership stake in Comverse among the investors we track, holding 700,095 shares valued at $13.79 million as of March 31.
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