In a recently-amended 13G filing with the U.S. Securities and Exchange Commission, Anchorage Capital Partners, founded by Kevin Michael Ulrich and Anthony Davis, reported owning 4.87 million shares of CONN’S Inc. (NASDAQ:CONN), which include 3.62 million shares and 1.25 million shares that may be acquired upon the exercise of options. Therefore, the New York-based investment firm has acquired 1.25 million options since its last filing on the specialty retailer, which suggests confidence in the future prospects of CONN’s. Let’s not forget to mention that the freshly-updated stake accounts for 13.3% of the company’s outstanding shares.
Let’s provide a brief introduction to Anchorage Capital Partners, which was founded in 2003 and is one of the largest U.S distressed credit hedge funds. The firm primarily invests in credit, special situations and illiquid investment markets in North America and Europe by employing an active long/short strategy. However, Anchorage Capital Partners tends to specifically focus on defaulted and leveraged issuers. Anthony Davis, one of the co-founders of the firm, announced his retirement to investors last year. In the meantime, the New York-based firm manages a public equity portfolio with a market value of $7.28 billion as of June 30.
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We will now turn our full attention to CONN’S Inc. (NASDAQ:CONN), a specialty retailer of furniture and mattresses, home appliances, consumer electronics and home office products, and provider of consumer credit. The stock had a wild run during the first half of the year, returning 112% during the first six months of 2015. However, the shares of CONN’S have been riding a steady downtrend since the beginning of July, so the spectacular return of 112% has narrowed down to 41%. Meanwhile, Anchorage Capital Partners is not the only hedge fund within our database becoming more bullish on CONN’S; Jason Karp’s Tourbillon Capital Partners reported an ownership stake of 3.25 million shares in the retailer earlier this month.
Just a few weeks ago, CONN’S Inc. (NASDAQ:CONN) was downgraded to “Hold” from “Buy” by Stifel Nicolaus, citing the company’s persistent credit issues. As already mentioned, the company is not only selling durable consumer goods, but is also providing credit financing for its credit-constrained customers. The steady-strengthening of its retail business has been offset by the worsening trends in its greater than 60-day delinquencies. To be more detailed, CONN’S reported a greater than 60-day delinquency rate of 9.2% at the end of the second quarter, compared to 8.7% registered in the same quarter a year ago. Even more to that, the company delivered a credit segment operating loss of $9.0 million, which was primarily caused by increased provision for bad debts.
John Baugh, Stifel Nicolaus’ analyst who stands behind the downgrade, indicated in a note to clients that: “Unfortunately, if the company cannot stabilize its charge-offs and past dues, the retail figures are somewhat meaningless as profits are booked upon the issuance of the loan in the retail segment, but the money has to be collected through time.” Having said that, it is not quite sure what has been driving the demand for the products marketed by CONN’S. Undoubtedly, the strengthening U.S economy and the improving labor market have driven up the sales of CONN’S, but it is also highly likely that the company’s strategy to serve the cash-strapped working class households has lured many customers to its stores.
In the meantime, CONN’S recently announced a number of strategic initiatives that are set to change the company’s business and position, which might in turn reduce risk and enhance shareholder value. These initiatives include the appointment of Norman Miller as the new Chief Executive Officer, entering into an agreement to securitize $1.4 billion of retail installment contract receivables, and a share repurchase program of up to $75 million of securities. Therefore, it appears that both Anchorage Capital Partners and Tourbillon Capital Partners boosted their stakes in the company betting on the success of the recently-announced initiatives.
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