Activist Fund Raging Capital Jettisons 2 Massive Positions, Plus Noteworthy Moves from 2 Other Hedge Funds

According to analysts at Morgan Stanley, traditional hedge funds experienced their worst quarterly performance since the financial crisis in the first quarter of this year. Equity long/short managers’ alpha, which measures their performance against broader market benchmarks, was at negative 4%, its lowest total in more than seven years. The hedge fund industry is widely known for its ability to generate alpha in a slow-growth environment, but the industry has failed to achieve this commonly-held belief thus far in 2016. Even so, tracking and examining hedge funds’ moves can be very informative for retail investors, especially when one zeroes in on the elite investors in the hedge fund industry. Therefore, we will discuss four fresh filings submitted to the SEC by several hedge fund vehicles tracked by Insider Monkey.

At Insider Monkey, we track around 785 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

Empyrean Capital Boosts Stake in Sears-Related REIT

In a new Schedule 13G filing, Empyrean Capital Partners LP, founded by Michael A. Price and Amos Meron, reported ownership of 1.35 million Class A shares in Seritage Growth Properties (NYSE:SRG), which account for 5.3% of the company’s outstanding common stock. This represents an increase from the stake of 1.07 million shares disclosed in the fund’s 13F filing for the October-to-December quarter. Seritage Growth Properties is a real estate investment trust (REIT) formed in June 2015 that wholly owns 235 properties across the United States and Puerto Rico, in addition to having interests in 31 joint venture properties. These properties include Sears Holdings Corp (NASDAQ:SHLD)’s 84 Kmart stores and 140 Sears stores, as well as an additional 11 properties leased to third-parties. These properties are leased to the embattled retailer under a master lease agreement that has an initial term of ten years, but also contains three options for five-year term renewals and a final option for a four-year renewal. As a result, the financial performance of the REIT is fully detached from the performance of the troubled retailer, which has seen its annual top-line results decline each year since 2007.

Seritage Growth Properties (NYSE:SRG)’s earnings are mainly derived from the rental revenue received from Sears Holdings and that rental income associated specifically with Sears totaled $64.8 million for the six month period that ended December 31, which accounted for 83.5% of total rental income. At the beginning of March, the REIT’s Board of Trustees declared a cash dividend for the first quarter of this year amounting to $0.25 per Class A and Class C unit of common stock, which equates to a dividend yield of 1.85%. The REIT’s Class A shares have gained 34% since the beginning of 2016. A total of 24 hedge funds in our database were invested in the REIT at the end of 2015. Gabriel Plotkin’s Melvin Capital Management owned 800,000 Class A shares of Seritage Growth Properties (NYSE:SRG) on December 31.

On the next two pages of this article we’ll discuss three other filings submitted with the SEC earlier this week.

GoldenTree Asset Lends Capital to Eagle Bulk Shipping

According to a Schedule 13D filing, Steven A. Tananbaum’s GoldenTree Asset Management LP currently owns 71.18 million shares of Eagle Bulk Shipping Inc. (NASDAQ:EGLE), which make up 18.6% of the company’s outstanding shares. GoldenTree had a mere 5.90 million shares of the company in its equity portfolio at the end of December. The freshly-upped stake reflects the delivery of shares required to be issued under the Second Lien Loan agreement between GoldenTree, as well as other lenders, and Eagle Bulk Shipping. At the end of March, the company obtained a new second lien facility of $60 million from existing shareholders, including Mr. Tananbaum’s GoldenTree, and new capital providers. Under the terms of the freshly-inked Second Lien Loan agreement, Eagle Bulk Shipping Inc. (NASDAQ:EGLE) agreed to issue and offer to each lender additional shares of common stock without paying additional capital. Although the issuance of additional shares requires shareholder approval, most shareholders of Eagle Bulk Shipping, some of whom represent Second Lien lenders, already agreed on the issuance when signing the agreement. The loan under the aforementioned facility carries a rate of LIBOR plus 14% per annum or Base Rate, which is indicated in the agreement, plus 13% per annum. Eagle Bulk also reached an agreement with its First Lien lenders, which, together with the Second Lien Loan agreement, provided the company with roughly $105 million in additional liquidity. The aforementioned agreements significantly strengthened the company’s balance sheet, which will enable its management to pursue market opportunities.

Eagle Bulk Shipping transports a wide range of bulk cargoes, which includes coal, grain, ore, petcoke, cement, and fertilizer. The company owns and operates a fleet of 44 Supramax segment dry bulk vessels as of the end of 2015. The company’s net revenue for 2015 were $103.86 million, down by 33% year-over-year due to lower charter rates earned by the fleet in 2015. Shares of Eagle Bulk Shipping are down by an eye-popping 91% in the past 12 months. There were six hedge funds in our system with stakes in the company at the end of December, with them aggregately amassing nearly 65% of its outstanding shares. Howard Marks’ Oaktree Capital Management owned 15.71 million shares of Eagle Bulk Shipping Inc. (NASDAQ:EGLE) on December 31.

Raging Capital Discards Entire Outerwall Stake

As revealed by a freshly-amended 13G filing, William C. Martin’s Raging Capital Management LLC no longer owns any shares of Outerwall Inc. (NASDAQ:OUTR). The fund held a position of 1.18 million shares on December 31 according to its most recent 13F filing. The provider of automated retail solutions has seen its shares advance by 13% since the beginning of 2016, partially owing to pressure from activist shareholder Engaged Capital LLC, headed by Glenn W. Welling. Long story short, the company recently prevented a possible proxy fight with Mr. Welling’s firm by agreeing to add three directors to its Board as part of a settlement agreement.

Outerwall Inc. (NASDAQ:OUTR)’s main offerings in automated retail include the following business operations: the Redbox business, which allows consumers to rent and purchase movies and video games from self-service kiosks; the Coinstar business, which enables consumers to convert coins to cash, as well as convert coins and cash to stored value products at self-service kiosks; and the ecoATM business, which enables consumers to sell certain electronic devices for cash, as well as purchase and sell electronic devices through an online solution under the Gazelle brand.

The company’s revenue was $2.19 billion in 2015, down from $2.29 billion in 2014. The decrease was mainly driven by weakening performance of the Redbox segment due to a 5.8% decrease in same-store sales and the reduction of underperforming kiosks. Redbox’s same-store sales decline was mainly attributable to a decline in movie rentals, which continue to be impacted by the sustained secular decline in the physical movie rental market, and fewer box office movie titles released in 2015. The decline in video game rentals, which is also being driven by a transition to the digital space (though slower than that affecting movies), also impacted the performance of the Redbox segment. Outerwall’s shares are currently changing hands at around 9.8-times expected earnings, versus the forward P/E multiple of 17.4 for the S&P 500 Index. A total of 27 money managers tracked by Insider Monkey were invested in Outerwall on December 31 and had accumulated approximately 37% of the company’s outstanding shares. Fresh SEC filings show that Engaged Capital owns 2.43 million shares of Outerwall Inc. (NASDAQ:OUTR), which constitute 14.6% of its outstanding shares.

Raging Capital Sells Entire Position in This Semiconductor Manufacturer

In a separate 13G filing with the SEC, Raging Capital Management LLC also disclosed that it has jettisoned its entire stake in Alpha and Omega Semiconductor Ltd (NASDAQ:AOSL). The fund’s previous 13G filing on the company, submitted with the SEC in mid-February, showed that Raging Capital owned 2.59 million shares of the manufacturer of power semiconductors, which accounted for 11.7% of the company’s shares. In fact, Raging Capital owned the 2.59 million-share position at the end of 2015 as well, so Mr. Martin’s investment firm earned a decent return on its investment in 2016, as the company’s shares are 38% in the green year-to-date. Raging Capital acquired a stake in the power semiconductors manufacturer in the second quarter of 2014, and those shares had traded nearly flat from the end of that quarter through the end of 2015.

Alpha and Omega Semiconductor Ltd (NASDAQ:AOSL)’s portfolio of products is mainly used in high-volume applications such as personal computers, flat panel TVs, LED lighting, smart phones, battery packs, and other applications. The company’s revenue for the six months that ended December 31 was $161.26 million, which was a decrease from $169.55 million in revenue reported for the same period of the prior year. A 10.4% decrease in unit shipments of power discrete and power IC products was somewhat offset by a 6.3% increase in average selling prices. The number of hedgies monitored by Insider Monkey with positions in the company increased to ten from seven during the December quarter, with those ten funds amassing nearly 18% of the company’s shares. Royce & Associates, managed by Chuck Royce, owns 622,354 shares of Alpha and Omega Semiconductor Ltd (NASDAQ:AOSL) as of the end of 2015.

Disclosure: None