Activist hedge fund Bandera Partners filed a 13D regarding Luby’s, Inc. (NYSE:LUB). Other hedge funds are reducing their bets on the stock. The number of long hedge fund positions retreated by 1 during the third quarter. Does it make sense to follow Bandera Partners into LUB?
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Let’s view the latest hedge fund action encompassing Luby’s, Inc. (NYSE:LUB).
What have hedge funds been doing with Luby’s, Inc. (NYSE:LUB)?
At Q3’s end, a total of 4 of the hedge funds tracked by Insider Monkey were long this stock, a change of -20% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards LUB over the last 13 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Luby’s, Inc. (NYSE:LUB) was held by Bandera Partners, which reported holding $2.6 million worth of stock at the end of September. It was followed by Harvest Capital Strategies with a $0.6 million position. Other investors bullish on the company included Renaissance Technologies and Millennium Management.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Ancora Advisors. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 700+ hedge funds tracked by Insider Monkey identified LUB as a viable investment and initiated a position in the stock.
Luby’s, Inc. (LUB) has been a true value destroying investment for the last 5 years as the stock lost nearly 80% of its value. Bandera’s Jeff Gramm’s letter to the company’s board explains what’s going on:
“Bandera Partners owns 2,619,721 shares of Luby’s, Inc. (“Luby’s” or the “Company”) common stock (“Common Stock”) or approximately 8.9% of the Company’s outstanding shares. We have owned Common Stock continuously for more than a decade, and have supported management and the Board of Directors for that entire time. Bandera is precisely the type of long-term shareholder that a well-managed company should want to have. I also have personal and business relationships with members of the Pappas family that run deep, and I view Christopher and Harris Pappas as pillars of their community and honest businesspeople.
I understand that Luby’s directors control approximately 38% of the outstanding shares of Common Stock. But I believe this is the outside shareholders’ last chance to salvage their investment in the company, and I feel a responsibility to take on this difficult battle on their behalf, rather than subject myself and other Luby’s shareholders to another year of value destruction. If any of you would like to speak with me about Bandera’s slate of Board nominees or any other matters, you can reach me at 212-232-4583.”
By the way, Senator Phill Gramm is Jeff Gramm’s father.
Anyway, we believe there is a decent chance that Bandera could be successful in its attempt to taking the control of the company. That’s what the market thinks as the stock appreciated 20% just this week. This isn’t a very liquid stock, so we won’t make any recommendations to our premium members regarding this stock. However, here is how I see it:
Bandera has about $2.5 million in this stock. Proxy fights are very costly (usually it costs at least $1 million). Assuming that Bandera prevails, the stock could climb to $3-$4. So, Bandera Partners will make at most $4 million in stock gains. Jeff Gramm and his partner will keep 20% of this as performance fees. Considering that Jeff Gramm can receive at most $800K by spending at least $1 million, it doesn’t make sense for him to pursue a time consuming campaign unless he is really really pissed at Christopher Pappas. By buying LUB today you are betting on a positive outcome. If that happens, the company will probably be liquidated and you will receive about $3 per share. If the outcome was negative, the stock can easily go below, $1.
Disclosure: None. This article was originally published at Insider Monkey.
