Akanthos Capital Management’s Top Stock Picks

The Woodland Hills, California-based Michael Kao‘s Akanthos Capital focuses on convertible arbitrage. At the end of September the market value of the fund’s public portfolio had increased to $66.06 million from $49.93 million at the end of June. About 29% of these investments were in the energy sector, while 24% were in the healthcare sector. Among the most valuable holdings were McDermott International (NYSE:MDR), Career Education Corp. (NASDAQ:CECO), WMIH CORPORATION (NASDAQ:WMIH), Brookdale Senior Living, Inc. (NYSE:BKD), and SandRidge Energy Inc. (NYSE:SD).

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We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see more details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

#5 SandRidge Energy Inc. (NYSE:SD)

Shares held (as of September 30): 13.4 million

Total Value (as of September 30): $3.62 million

Percent of Portfolio (as of September 30): 5.48%

Akanthos significantly increased its stake in SandRidge Energy Inc. (NYSE:SD) during the third quarter by acquiring 6.9 million shares of the oil and natural gas company. The move has paid off well for the fund as shares of SandRidge posted double digit gains following the announcement of company’s third quarter financial results in which it posted a smaller quarterly loss than expected. Prem Watsa’s Fairfax Financial Holdings is the largest stockholder of SandRidge Energy Inc. (NYSE:SD) within our database as it held about 50.89 million shares of the company at the end of June.

#4 Brookdale Senior Living, Inc. (NYSE:BKD)

Shares held (as of September 30): 178,867

Total Value (as of September 30): $4.11million

Percent of Portfolio (as of September 30): 6.22%

The fund initiated a position in Brookdale Senior Living, Inc. (NYSE:BKD) during the second quarter and added some 154,000 shares in the following three months. So far this year the stock price of the $4.28 billion operator of senior living communities is down by nearly 37%. The company was downgraded to ‘Neutral’ from ‘Buy’ by Bank of America / Merrill Lynch last month. However, revenues for the third quarter were in line with the estimates, while FFO for the REIT stood at $0.59, slightly ahead of expectations by $0.01. Larry Robbins‘ Glenview Capital held nearly 11.6 million shares of Brookdale Senior Living, Inc. (NYSE:BKD) at the end of June.

#3 WMIH CORPORATION (NASDAQ:WMIH)

Shares held (as of September 30): 1.83 million

Total Value (as of September 30): $4.76 million

Percent of Portfolio (as of September 30): 7.21%

During the September trimester Akanthos increased its stake in WMIH CORPORATION (NASDAQ:WMIH) by 9%. So far this year the stock price of the reinsurance company has risen by about 14.6%. The company made a switch from the OTC market to NASDAQ at the end of September. Stephen J. Errico’s Locust Wood Capital Advisers is the largest stockholder of WMIH CORPORATION (NASDAQ:WMIH) holding about 3.59 million shares of the company at the end of the third quarter.

#2 Career Education Corp. (NASDAQ:CECO)

Shares held (as of September 30): 2 million

Total Value (as of September 30): $7.52 million

Percent of Portfolio (as of September 30): 11.83%

In the third quarter Akanthos hiked its holding in the educational services company by a hefty 68%, while the company’s stock price gained nearly 10% during the same period. Career Education Corp. (NASDAQ:CECO)’s stock might be close to exploding, since the estimated earnings for the current fiscal year are expected to grow by about 81.9% as compared to last year and the stock price hasn’t reflected that appreciation yet and is down by more than 27% during the last 12 months. Blum Capital Partners, which is led by Richard Blum, heads our list of Career Education Corp. (NASDAQ:CECO)’s shareholders as it held about 3.32 million shares at the end of the second quarter.

#1 McDermott International (NYSE:MDR)

Shares held (as of September 30): 500,000

Total Value (as of September 30): $8.08 million

Percent of Portfolio (as of September 30): 12.22%

A total of 125,000 McDermott International (NYSE:MDR) shares were acquired by Akanthos during the third trimester. The stock price of the $1.43 billion engineering, procurement and construction (EPC) company focused on executing oil and gas projects has more than doubled so far this year. The company managed to significantly grow its backlog of projects during the September quarter, which includes the record-setting deal in Saudi Arabia. Moreover, recently McDermott also announced that it has been awarded a large brownfield contract by RasGas Company Limited (RasGas) on Qatar’s offshore. In its financial results for the third quarter McDermott beat both the top and bottom line estimates. Michael Blitzer‘s Kingstown Capital Management held 4 million shares of McDermott International (NYSE:MDR) at the end of June.

Disclosure: None