The practice of monitoring quarterly 13F filings has become more popular in recent years, which led to several exchange traded funds (ETFs) being launched. The research conducted by Insider Monkey stresses the value and usefulness of these quarterly filings, but 13D filings can offer even more valuable and up-to-date insights about hedge funds’ stances on their conviction stock picks. Activist targets have been proven to greatly outperform the broader market on aggregate, but investors’ ability to identify and pin down the most evident alpha-rich ideas from 13D filings may generate even higher returns. For that reason, this article will discuss two activist filings (13D) and one passive filing (13G) submitted by several hedge fund investors monitored by our team.
We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated ten percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real-time and these stocks have beaten the market by 53 percentage points (102% return vs. the S&P 500’s 48.7% gain) over the last 38 months (see the details here).
According to a 13D filing, Peter Kolchinsky’s RA Capital Management owns 7.09 million shares of Wave Life Sciences Ltd (NASDAQ:WVE), which represent 33.9% of the now-public company’s outstanding common stock. Most of these shares were acquired in a private placement at the beginning of January. It is also worth pointing out that Kolchinsky is a member of the company’s Board of Directors. The preclinical biopharmaceutical company that uses a proprietary synthetic chemistry drug development platform to design and develop a wide array of nucleic acid therapeutic candidates went public on November 11, selling nearly 6.38 million shares to the public at an IPO price of $16 per share. The ordinary shares started trading on the NASDAQ on the same day and are currently trading slightly above the IPO price. Wave Life Sciences Ltd (NASDAQ:WVE)’s team asserts that nucleic acid therapeutics have the potential to deal with and treat diseases that are difficult to treat with small molecule drugs or biologics. Thus, the company is focused on developing single-stranded nucleic acid therapeutics that could be broadly distributed within the human body and target diseases across multiple organ systems and tissues. However, a potential investment in Wave Life Sciences is quite risky, as the company’s approach is quite novel, which makes it substantially harder to develop marketable product candidates.
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Let’s head to the second page, where we disclose Dalton Investments’ move on a global company in the Indian film entertainment industry and Eminence Capital’s freshly-acquired stake in a hotel operator.
In a freshly-amended 13D filing, Gifford Combs’ Dalton Investments reported owning 2.06 million shares of Eros International plc (NYSE:EROS), accounting for 6.4% of the company’s outstanding shares. This compares with the 2.00 million-share position disclosed through the initial 13D filing regarding this investment that the Insider Monkey team covered earlier this month. Most importantly, James B. Rosenwald III, co-founder and managing partner of Dalton Investments, released a six-point action plan that could “improve the foundation of Corporate Governance at Eros”. This plan suggests Eros International plc (NYSE:EROS)’s management simplify its corporate structure, appoint more independent directors, and focus on execution, among other things. The Dalton Investments co-founder also believes that the shares of Eros are deeply undervalued. The Bollywood film producer has a trailing price-to-earnings ratio of 11.16, which is significantly below the average of 23.18 for the S&P 500 companies. Shares of Eros have been declining since mid-October, when an anonymous Twitter user questioned the company’s United Arab Emirates sales and the number of subscribers of its Eros Now digital service. Earlier this month, short seller Glaucus Research Group asserted that Eros shares should be trading for nothing, given its corporate debt. Meanwhile, the stock is up by more than 2% thus far in today’s trading session.
The number of smart money investors with positions in Eros at the end of the third quarter stood at 16, compared with 14 registered following the quarter prior to that. These investors held 8.40% of the company’s outstanding common stock, while the value of their positions grew to $130.26 million from $72.46 million quarter-over-quarter. Tiger Global Management, founded by Chase Coleman, initiated a new position of 1.2 million shares in Eros International plc (NYSE:EROS) during the September quarter.
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As stated by a Schedule 13G filing, Ricky Sandler’s Eminence Capital holds a 9.62 million-share position in La Quinta Holdings Inc. (NYSE:LQ), which represents a new addition to the hedge fund firm’s portfolio. The freshly-acquired stake accounts for 7.4% of the company’s outstanding shares. The operator and franchisor of select-service hotels has had a rough year in terms of stock performance, with its shares declining by 31%. Just recently, analysts at Credit Suisse downgraded La Quinta Holdings Inc. (NYSE:LQ)’s stock to ‘Neutral’ from ‘Outperform’ and cut its price target to $18 from $20, citing slowing revenue per available room growth, management uncertainty, and worries about toughening competition. The company’s third quarter room revenues at its owned hotels added up to $238.8 million, up by $4.1 million or 1.7% year-over-year. This increase is mainly attributable to an increase in the company’s RevPAR, which was partially offset by a slump in occupancy rates. Meanwhile, its 532 franchised hotels generated franchise and other fee-based revenues of $28.5 million for the quarter, compared with $25.2 million reported for the same quarter of last year.
The hotel operator lost some of its charm among the hedge funds tracked by the Insider Monkey team in the third quarter, with the number of smart money investors with stakes in the company decreasing to 24 from 29 during the three-month period. Similarly, the value of these stakes declined to $318.90 million from $384.56 million quarter-over-quarter. These 24 hedge fund investors owned 15.50% of the company’s outstanding common stock on September 30. Parag Vora’s HG Vora Capital Management added a 2.5 million-share position in La Quinta Holdings Inc. (NYSE:LQ) to its equity portfolio during the July-to-September period.
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