Hologic Inc. (HOLX): Activist Icahn Trims Position; Engaged Capital Intensifies Proxy Fight with Benchmark Electronics Inc. (BHE) & Other Smart Money Moves

After experiencing several years of expansionary monetary policy pursued by the Federal Reserve to stimulate the U.S. economy, we are currently facing a period of rising rates and monetary tightening. Although the path of rate-increases is quite unclear at the moment, there is good reason to believe that the U.S. economy and equity markets are entering a period of so-called normalization. It is widely-known that hedge funds employ various investment strategies that generally involve different risks for both money managers and those monitoring hedge fund moves. It is believed that event-driven and long/short equity strategies are the most promising strategies in a low-growth, rising-rate environment, so retail investors monitoring the hedge fund industry should be able to recognize what type of strategy each fund employs before blindly mimicking any moves. Having this in mind, this article discusses four SEC filings submitted with the SEC by renowned investment firm tracked by Insider Monkey.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

According to a new Schedule 13D, Jeffrey Bronchick’s Cove Street Capital LLC currently owns 5.32 million shares of EVINE Live Inc. (NASDAQ:EVLV), which make up 9.3% of the company’s outstanding stock. This compares with the stake 5.37 million shares disclosed in the fund’s previous filing on the company (a 13G filing), which was filed with the SEC in February. Although Cove Street Capital did not change significantly its ownership stake in EVINE Live, the fund did shift to an activist position. The filing added that Mr. Bronchick’s investment firm purchased EVINE’s shares with the belief that they were undervalued and represented an attractive investment opportunity at the time of acquisition. The filing also revealed that Cove Street Capital has had discussions with the digital commerce company regarding operational improvements and strategic direction, making suggestions in connection to the composition of the company’s Board of Directors.

EVINE Live Inc. (NASDAQ:EVLV) operates a television shopping network, called EVINE Live, through which the company markets a wide range of brand name and proprietary products such as jewelry and watches, home and consumer electronics, and other products.  The company generated net sales of $693.3 million during fiscal 2015, ended January 30, up from $674.6 million reported for fiscal 2014. Nonetheless, EVINE Live’s bottom-line results have disappointed investors in recent quarters. The company’s net loss for fiscal 2015 widened to $12.28 million from $1.38 million in fiscal 2014. In a fourth-quarter letter to investors, Cove Street Capital wrote the following: “Given its future earnings power and the value of its Boston TV station (a hidden but potentially meaningful asset), we expect EVLV to be a much better performer in the future.” Shares of EVINE Live have declined by 84% in the past 12 months. The hedge fund sentiment towards the digital commerce company declined in the final quarter of 2015, with the number of funds invested in the company shrinking to 11 from 16 quarter-on-quarter. J. Carlo Cannell’s Cannell Capital owns 4.61 million shares of EVINE Live Inc. (NASDAQ:EVLV) as of December 31.

The next two pages of this article examine three other filings recently submitted with the SEC.

In a newly-amended 13D filing, Carl Icahn’s Icahn Capital LP reported ownership of 19.17 million shares in Hologic Inc. (NASDAQ:HOLX), which account for 6.75% of the company outstanding shares. This marks a decrease of 3.06 million shares from the stake disclosed in the previous 13D filing, submitted with the SEC in mid-March. At the beginning of this month, Jonathan Christodoro and Samuel Merksamer, both employees of Mr. Icahn’s investment firm, resigned from the company’s Board of Directors, with Icahn Capital deciding not to replace the emptied Board seats. The activist investor acquired a double-digit stake in Hologic Inc. (NASDAQ:HOLX) in 2013, voicing his plans to “get involved on the board” rather than break-up or push for a sale of the company. In December 2013, the developer and supplier of diagnostics products, medical imaging systems and surgical products announced the appointment of the aforementioned freshly-resigned Directors, after reaching a settlement agreement with Icahn Capital LP.

Shares of Hologic have advanced by 58% in the past two years, with Mr. Icahn and his team greatly contributing to the exceptional performance delivered by the company. The smart money sentiment towards Hologic decreased notably in the fourth quarter of 2015, as the number of money managers with stakes in the company declined to 33 from 38 quarter-on-quarter. Those 33 hedge funds amassed 15.17% of the company on December 31. Jim Simons’ Renaissance Technologies acquired a new stake of 1.67 million shares in Hologic Inc. (NASDAQ:HOLX) during the December quarter.

As disclosed in a Schedule 13G filing, John H. Lewis’ Osmium Partners LLC currently owns 2.07 million shares of Rosetta Stone Inc. (NYSE:RST), representing 9.5% of the company’s outstanding common stock. This compares with the stake of 2.12 million shares disclosed in the fund’s 13F filing for the final quarter of 2015. According to several filings with the SEC, the provider of technology-based interactive language-learnings solutions is seeking to optimize profitability of its language and literacy Enterprise & Education segment by exiting the direct sales presence in most non-U.S. and non-northern European markets. The company also plans to close its software development operations in France and China. The freshly-announced refocus and realignment efforts are expected to reduce Rosetta Stone’s global full-time headcount by roughly 17%, which would result in annual expense reductions of $19 million. The language-learning company plans to implement these seemingly major moves in order to drive up profitability.

Rosetta Stone Inc. (NYSE:RST) operates its business through two separate segments: the Enterprise & Education segment, which generates revenue from sales to educational institutions, corporations, and government agencies around the globe; and the Consumer segment, which involves sales to individuals and retail partners. The company’s total revenue for 2015 was $217.67 million, down from $261.85 million in 2014 and $264.65 million in 2013. The decrease was driven by a decline of $57.5 million in Consumer revenues, partly offset by a $13.4 million increase in Enterprise & Education revenue. Rosetta Stone has seen its market value decline by 15% in the past 12 months. John W. Rogers’ Ariel Investments is the largest equity holder of Rosetta Stone Inc. (NYSE:RST) within our database, with 4.14 million shares as of the end of 2015.

In a Proxy Statement filed with the SEC, Glenn W. Welling’s Engaged Capital LLC urges shareholders of Benchmark Electronics Inc. (NYSE:BHE) to support the election of the fund’s three nominees at the company’s annual meeting of shareholders that is scheduled to take place in May. The filing said that Engaged Capital is “concerned that the Board is not taking the appropriate action to execute upon the opportunities that we believe are available to drive shareholder value”. Mr. Welling’s investment firm, which owns 2.44 million shares of the provider of integrated manufacturing, design and engineering services and product life cycle solutions, believes that Benchmark’s shares are deeply undervalued, as well as reckons that the Board’s “undisciplined approach to capital allocation demonstrates its inability or unwillingness to be an effective steward of shareholder capital”.

In November 2015, Benchmark Electronics Inc. (NYSE:BHE) acquired Secure Communication Systems. a provider of customized electronics, sub-systems, and component solutions, for $230 million, a move that had been strongly discouraged by Engaged Capital. The recent filing said that the company’s freshly-completed acquisition of Secure “has only heightened our concern regarding the Board’s approach to capital allocation”. Moreover, Mr. Welling and his team believe that companies operating in the electronics manufacturing services (EMS) industry, including Benchmark Electronics, are well-positioned to experience improving valuations in the upcoming years. In a fresh statement released by Benchmark, the company urges shareholders to vote its current slate of Directors at the upcoming meeting of shareholders, saying that “Engaged Capital’s nominees, if elected, will seek to advance Engaged Capital’s short-sighted interests based on fundamentally flawed and misguided analysis ahead of the best interests of all shareholders”. A total number of 20 money managers from our database were invested in Benchmark at the end of December 2015, accumulating almost 13% of its outstanding shares. Royce & Associates, founded by Chuck Royce, trimmed its stake in Benchmark Electronics Inc. (NYSE:BHE) by 59% during the October-to-December period, ending 2015 with 2.43 million shares.

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