James Dondero is the man behind Highland Capital, an investment firm specializing in credit investments. Highland Capital uses a long-only credit strategy and has experience of over two decades of investing in credit products starting in 1993. In equities it employs a long/short equity strategy and has applied its investment strategies across different sectors including high yield credit, health care, structured products, distressed and special situation loans, emerging market investments, real estate, and the oil and gas industry. As a complete investment group, Highland Capital has assets worth $21 billion under management and a public equity portfolio valued at $4.86 billion as of March 31, and is among the largest collateralized loan obligations (CLOs) managers. Highland Capital launched three new exchange-traded funds (ETFs) earlier this month including Highland HFR Global ETF (NYSE:HHFR), Highland HFR Event Driven ETF (NYSE:DRVN), and Highland HFR Equity Hedge ETF (NYSE:HHDG). As per its latest 13F filing, the fund manager has its primary investments in healthcare, finance, and technology. Loral Space & Communications Ltd. (NASDAQ:LORL), Media General Inc (NYSE:MEG), and Ocean Rig UDW Inc (NASDAQ:ORIG) are among the top small-cap stock picks of Dondero, and we’ll look at those stocks in this article.
Highland Capital Management is just one of more than 700 hedge funds that we have in our database, whose equity portfolios we collate quarterly as part of our small-cap strategy. Even though most smaller investors believe that tracking 13F filings is a fruitless endeavor because they are filed with a delay of a maximum of 45 days after the end of a calendar quarter, the results of our research prove that is not the case. To be on the safe side, we used a delay of 60 days in our backtests that involved the 13F filings of funds between 1999 and 2012 and we still managed to gain an annual alpha in the double digits. Moreover, since the official launch of our strategy in August 2012, our small-cap strategy has obtained returns of more than 142%, beating the S&P 500 Total Return Index by greater than 83 percentage points (see the details).
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Highland Capital holds 2.11 million shares of Loral Space & Communications Ltd. (NASDAQ:LORL) valued at $144.36 million. 30 hedge funds that we track at Insider Monkey have included the satellite company in their portfolio, which has a market cap of $1.43 billion. The investment manager holds 9.85% of the outstanding shares of Loral Space & Communications Ltd. (NASDAQ:LORL). The satellite service provider has received investments from other fund managers including Mark Rachesky’s MHR Fund Management, whose current position in Loral Space & Communications includes 8.13 million shares valued at $556.40 million. According to a 13D filed by MHR in March 2015, the investment manager wrote to Loral Space & Communications Ltd. (NASDAQ:LORL) asking for a class III director position in the company ahead of its annual shareholder meeting in 2015. Shares are down by 16% year-to-date.
Media General Inc (NYSE:MEG) comes in at number two on the list of small-cap investments of Highland Capital. The investment manager’s current position in the multimedia company includes 6.86 million shares valued at $113.08 million and it forms 2.32% of Dondero’s overall public equity portfolio. The media company works in 48 different markets and operates/services 71 TV stations throughout the country. The Richmond, Virginia-based media firm offers digital marketing solutions including content marketing, mobile and display advertising solutions, and social intelligence services. Dondero controls 5.26% of the overall outstanding shares of Media General Inc (NYSE:MEG), which has a market cap of $2.21 billion. For investors following major hedge fund managers, it could be a relief to know that Warren Buffett has included Media General in his portfolio. His current stake in the company includes 4.65 million shares with a market value of $76.62 million. Media General is up by just under 2% in 2015.
Highland Capital increased its position in Ocean Rig UDW Inc (NASDAQ:ORIG) by 51% during the first quarter and currently holds 11.33 million shares valued at $74.70 million. The offshore drilling contractor, with a market cap of $986.25 million, announced the closing of an offering of 28.57 million shares at $7.00 per share on June 8. The company received a total of $193.9 million out of the offering after deducting expenses and fees. Ocean Rig UDW Inc (NASDAQ:ORIG) announced net income of $41.1 million for the first quarter of 2015 against a net loss of $1.5 million in the prior year period. The net revenue of Ocean Rig was $402.08 million for the reported period against net revenue of $360.76 million for the first quarter of 2014. Shares of Ocean Rig have dropped by more than 38% year-to-date, which has partially contributed to a surprisingly high dividend yield of 13.26%. However, Barclays recently initiated coverage of Ocean Rig UDW Inc (NASDAQ:ORIG) with an ‘Underweight’ rating and price target of $5, potential downside of over 12%, suggesting the drop off is not done yet and putting a damper on that impressive dividend yield. Phill Gross and Robert Atchinson’s Adage Capital Partners has the second-largest equity position in Ocean Rig after Highland, which owns the largest.
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