Lyon Street Capital Is Extremely Bullish on These Five Stocks

Brian C. Freckmann‘s Lyon Street Capital uses a bottom-up stock picking approach to identify value stocks in the small-cap, mid-cap, and large-cap space. The market value of the fund’s public equity portfolio stood at $137.87 million at the end of September. We decided to take a closer look at the firm’s top bets, which include GTT Communications Inc (NYSE:GTT), Atlas Financial Holdings Inc (NASDAQ:AFH), Grand Canyon Education Inc (NASDAQ:LOPE), Natus Medical Inc (NASDAQ:BABY), and Herbalife Ltd. (NYSE:HLF).

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Hedge funds have been underperforming the market for a very long time. However, this was mainly because of the huge fees that hedge funds charge as well as the poor performance of their short books. Hedge funds’ long positions performed actually better than the market. Small-cap stocks, activist targets, and spin offs were among the bright spots in hedge funds’ portfolios. For instance, the 15 most popular small-cap stocks among hedge funds outperformed the market by more than 53 percentage points since the end of August 2012 (read the details here). This strategy also managed to beat the market by double digits annually in our back tests covering the 1999-2012 period.

#5 Herbalife Ltd. (NYSE:HLF)

Shares held (as of September 30): 110,326

Total Value (as of September 30): $6.01 million

Percent of Portfolio (as of September 30): 4.36%

By almost doubling its Herbalife Ltd. (NYSE:HLF) holding in the third quarter we know which side of the Carl Icahn and Bill Ackman battle is Lyon Street on. Judging by the 43.79% surge  in the company’s stock price since the beginning of this year, many would have dispelled the belief that Herbalife is, as Ackman puts it, a Ponzi scheme. Although the $5.07 billion maker of nutritional products delivered a third quarter EPS of $1.28, handily beating estimates by $0.23, quarterly revenues of $1.1 billion came in $50 million lighter than expectations. The famous activist investor Carl Icahn‘s Icahn Capital LP held 17 million shares of Herbalife Ltd. (NYSE:HLF) at the end of the June trimester.

#4 Natus Medical Inc (NASDAQ:BABY)

Shares held (as of September 30): 175,068

Total Value (as of September 30): $6.91 million

Percent of Portfolio (as of September 30): 5.01%

During the September quarter Lyon increased its stake in the provider of newborn care and neurology healthcare products and services by 21%. So far this year the stock has risen by a staggering 30%. Roth Capital recently reiterated its ‘Buy’ rating on the company and increased the price target to $53 from $51, which provides an upside of about 13% to the current trading levels. The company not only beat both the top and bottom line estimates in its financial results for the third trimester, but also raised guidance for the fiscal year 2015. Revenues are now expected in the $378 million – $381 million range as compared with the earlier estimate of $376 million – $378 million, while the estimates for Non-GAAP EPS have climbed to the range of $1.51 to $1.53 from $1.50 to $1.52. Ric Dillon‘s Diamond Hill Capital tops our list of Natus Medical Inc (NASDAQ:BABY)’s stockholders as it owned about 958,306 shares of the company at the end of September.

#3 Grand Canyon Education Inc (NASDAQ:LOPE)

Shares held (as of September 30): 181,830

Total Value (as of September 30): $6.91 million

Percent of Portfolio (as of September 30): 5.01%

Lyon Street acquired nearly 12,000 additional shares of Grand Canyon Education Inc (NASDAQ:LOPE) during the July-September quarter despite the fact that the stock price of the post-secondary education provider has been trending south so far this year, with current depreciation of 17.55%. However, it has still managed to outperform the for-profit education sector and managed to beat both the top and bottom line estimates in its financial results for the third quarter. The renowned managed futures fund, Renaissance Technologies, led by Jim Simons is one of the largest stockholders of Grand Canyon Education Inc (NASDAQ:LOPE) within our database, as it owns about 1.23 million shares of the company as of the end of September.

#2 Atlas Financial Holdings Inc (NASDAQ:AFH)

Shares held (as of September 30): 416,623

Total Value (as of September 30): $7.71 million

Percent of Portfolio (as of September 30): 5.59%

Lyon Street has held a stake in the Canada-based company since the second quarter of 2014 but a major boost in the holding came during the last quarter when the fund increased its stake by 58%. In the last 12 months the stock has appreciated by more than 27%, which beats the 2.59% average gains of the insurance industry during the same time period. Although the company’s third quarter revenues of $43.12 million were 63.3% higher than for the same period last year, but they slightly missed the estimates by $0.33 million. The quarterly EPS of $0.32 were also $0.03 below the expected mark. Richard Driehaus‘ Driehaus Capital held about 237,000 shares of Atlas Financial Holdings Inc (NASDAQ:AFH) at the end of the second quarter.

#1 GTT Communications Inc (NYSE:GTT)

Shares held (as of September 30): 452,162

Total Value (as of September 30): $10.52 million

Percent of Portfolio (as of September 30): 7.63%

During the third quarter Lyon hiked its stake in GTT Communications Inc (NYSE:GTT) by a hefty 80%. So far this year the stock of the $761.51 million technology company has appreciated by nearly 62%. Drexel Hamilton recently upgraded the company to ‘Buy’ from ‘Hold’. Moreover, Cowen also initiated coverage on GTT with an ‘Outperform’ rating and a price target of $31, representing an upside of 47% to the current trading level. In mid-September GTT announced the $175 million buyout of Open Source Networks. Cannell Capital, which is managed by J. Carlo Cannell held 1.75 million shares of GTT Communications Inc (NYSE:GTT) at the end of June.

Disclosure: None