At Insider Monkey, we closely follow the activity of over 700 large and small hedge funds. Even though the largest part of our work comes around the time of the quarterly rounds of 13F filings, we also track the day-to-day moves that hedge funds disclose in their filings with the Securities and Exchange Commission. One of the funds that we track, Luxor Capital Group, managed by Christian Leone, disclosed in a new filing with the Securities and Exchange Commission that it has acquired 4.25 million shares of the Over-the-Counter stock of Searchlight Minerals Corp. (OTCMKTS:SRCH). The shares are held through warrants that are exercisable five years from now. In total, through warrants and units of common stock, Luxor is deemed to hold 40.81 million shares of Searchlight Minerals Corp. (OTCMKTS:SRCH), which represent 24.4% of the company’s common stock. Searchlight Minerals Corp. (OTCMKTS:SRCH) is a $30 million exploration stage company engaged in the acquisition and exploration of slag and other mineral properties.
We are interested in the moves that hedge funds disclose in their filings because we consider that this activity can provide some interesting investment opportunities for smaller investors. Hedge funds generally conduct a very detail-oriented research, because they invest large amounts of capital. The track record of these investors shows a solid alpha over the years, but of late, as their assets started to grow at a very high pace, hedge funds have had to invest in companies that have a smaller chance of generating high returns. As our backtests of the equity portfolios of several hundred hedge funds between 1999 and 2012 show, an equally-weighted portfolio consisting of the top 50 stocks of hedge funds generated a monthly alpha of 6 basis points and underperformed the market by an average of 7 basis points per month. Moreover, in the last three years (2012-2014), equity hedge funds generated returns of 4.8%, 11.1%, and 1.4%, which is significantly below the S&P 500 ETF (SPY) gains of 16%, 32.3%, and 13.5%.
However, despite some studies’ claims that the average hedge fund today doesn’t have any alpha, it doesn’t mean that they are bad at picking stocks. A retail investor can still take some insights from following the activity of hedge funds. The key is to focus on the most popular small-cap stock picks, because they generally provide returns capable of beating the market. Our strategy that imitates the 15 most popular small-cap stocks among over 700 hedge funds managed to return 132% over the last 2.5 years (read more details here), beating the S&P 500 ETF (SPY) by around 79 percentage points.
And since we are talking about Luxor Capital, let’s take a closer look at its equity portfolio. In its latest 13F filing, Mr. Leone’s fund reported holding around $4.96 billion in equities in a relatively balanced portfolio primarily dedicated to Technology and Services stocks, with other sectors amassing smaller portions. Luxor’s largest holdings are represented by mid-cap and large-cap companies, such as Yahoo! Inc. (NASDAQ:YHOO), Voya Financial Inc (NYSE:VOYA), and Constellation Brands, Inc. (NYSE:STZ). However, the fund also has some exposure to the small-cap space and we have selected the fund’s three largest positions in terms of value represented by small-cap companies: BJ’s Restaurants, Inc. (NASDAQ:BJRI), CONN’S, Inc. (NASDAQ:CONN), and Nexstar Broadcasting Group, Inc. (NASDAQ:NXST).
In BJ’s Restaurants, Inc. (NASDAQ:BJRI), Luxor holds around 3.50 million shares as of the end of 2014, valued at $175.89 million. In March, 2014, Mr. Leone formed an activist group with Patrick Welsh’s PW Partners Atlas Fund and Jeffrey C. Neal from Horizon Capital, agreeing to cooperate and seek representation on the company’s board of directors. In April, the activist group entered into an agreement with BJ’s Restaurants to nominate three directors to the board. The stock of the $1.3 billion restaurant operator is up by about 56% since the end of March 2014. However, last week, Tigress Financial initiated coverage on BJ’s Restaurants, Inc. (NASDAQ:BJRI), setting an ‘Underperform’ rating and the stock currently has a consensus ‘Hold’ rating with a price target of $52.70, which shows little upside over the current price. Luxor is currently the largest shareholder of BJ’s Restaurants, Inc. (NASDAQ:BJRI), among the funds that we track, with other investors holding much less significant positions, such as Douglas Dillard Jr. and Raj D. Venkatesan’s Standard Pacific Capital, which owns roughly 212,900 shares.
Luxor’s next two largest positions among small-cap stocks come very close in the equity portfolio, being situated on the 12th and 13th places. The investor disclosed holding 7.59 million shares of CONN’S, Inc. (NASDAQ:CONN), valued at $141.79 million and 2.56 million shares of Nexstar (down by 17% on the quarter) worth $132.38 million. Conn’s stock is down by 23% over the past year amid disappointing financial results, although since the beginning of the year the stock has managed to recover slightly and gain 59% year-to-date. The main problem that affected CONN’S, Inc. (NASDAQ:CONN) previous earnings results was its credit portfolio, as the company had to increase its provisions for credit losses. In this way, shareholders’ eyes will be focused on Conn’s tomorrow, as it reports its financial results for the fourth quarter of fiscal 2015. Greenlight Capital, managed by David Einhorn, is another shareholder of CONN’S, Inc. (NASDAQ:CONN), owning 3.56 million shares as of the end of 2014.
Nexstar Broadcasting Group, Inc. (NASDAQ:NXST)‘s stock has also enjoyed a strong run, advancing by more than 57% over the last 52 weeks. The company has a market cap of $1.80 billion and is engaged in television broadcasting and digital media, operating TV Stations and community websites in the US. During the fourth quarter, the number of funds holding shares of Nexstar Broadcasting Group, Inc. (NASDAQ:NXST) increased to 26 from 24, and the aggregate value of stakes held by these funds appreciated to $818.82 million, from $666.75 million at the end of September. Luxor is the second-largest shareholder of Nexstar Broadcasting Group, Inc. (NASDAQ:NXST), trailing Marc Lisker, Glenn Fuhrman, and John Phelan’s MSDC Management, which owns 3.06 million shares.
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