One of the cornerstones of value investing is picking out companies that the market has written off, but which could be strong market players in the future. Three hedgies, namely William Martin, Gabe Hoffman and Dennis Purcell, have taken a shine to three such companies that have fallen out of the market’s favor. Let’s look into these stocks and latest moves concerning them and consider if a retail investor should follow suit.
First up is William Martin’s Raging Capital Management, which has further increased its involvement with GulfMark Offshore, Inc. (NYSE:GLF), as Martin was recently appointed to the Board of Directors of the $121.71 million provider of offshore marine support and transportation services to the oil and natural gas industry. The firm acquired an additional 293,500 shares of GulfMark in November, taking its holding to over 5.11 million shares, accounting for 19.9% of the company’s outstanding shares. The turmoil in the energy sector has enveloped GulfMark Offshore, Inc. (NYSE:GLF) as well and its stock price has slid by more than 80% in the last 12 months, which is significantly more than the approximately 25% average dip for the oil-related services and equipment industry. Among the greater than 700 hedge funds that we track at Insider Monkey, there was generally a bearish sentiment towards GulfMark in the third quarter. A total of 9 funds had investments worth $35.13 million in the company at the end of September, compared to 12 firms with $65.41 million in stock a quarter earlier. Ken Griffin’s Citadel Investment Group is another prominent stockholder of GulfMark Offshore, Inc. (NYSE:GLF), holding about 368,200 shares.
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Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 38 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
On the next page we have Purcell and Hoffman’s picks in the undervalued companies space.
Gabe Hoffman’s healthcare-focused fund Accipiter Capital Management has significantly boosted its stake in energy company Foresight Energy LP (NYSE:FELP). The firm now holds about 7.92 million shares along with its affiliated funds, representing more than 12% of Foresight’s outstanding stock. Accipiter intiated a holding in the company during the third quarter, of some 607,600 shares. The stock price has fallen by more than 50% since the end of that quarter, and is down by about 85% so far this year. Foresight’s RSI value currently stands at 21.87, signalling that it is well into oversold territory. Dmitry Balyasny’s Balyasny Asset Management didn’t feel so upbeat about Foresight Energy LP (NYSE:FELP)’s future prospects, as it sold some 570,000 shares of the company during the third trimester , lowering its holding to about 835,000 shares.
Another healthcare-focused fund that is betting on a fallen star within its specialty sector is Dennis Purcell’s Aisling Capital, with $220.51 million in vitro diagnostics company T2 Biosystems Inc (NASDAQ:TTOO) being the star in question. According to a recent filing with the Securities and Exchange Commission, Aisling acquired some 307,700 shares of T2, lifting his holding to 2.83 million shares, more than 11% of the company’s outstanding stock. So far this year T2’s share price has fallen by about 52%. However, in its financial results for the third trimester, T2 Biosystems Inc (NASDAQ:TTOO) beat both the top and bottom line estimates of analysts, as its quarterly loss per share stood at $0.57 on $1.05 million in revenue. Steve Cohen’s Point72 Asset Management hiked its stake in T2 Biosystems Inc (NASDAQ:TTOO) to 500,000 shares during the July-to-September period.
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