Why A Major Shareholder Keeps Jettisoning Shares Of This Airline

In a recently submitted 13D filing with the SEC, Zac Hirzel‘s Hirzel Capital Management revealed that it has further reduced its stake in Hawaiian Holdings, Inc. (NASDAQ:HA), by 21.8% to 2.56 million shares or 4.7% of the outstanding shares of the company. Mr. Hirzel has been reducing his stake in the company, which at its peak stood at over 5.6 million shares, since the fourth quarter of 2014.

Zac Hirzel founded Hirzel Capital Management, a Dallas, Texas-based activist hedge fund, in 2008. At the end of June, Hirzel Capital’s U.S public equity portfolio was worth slightly above $1 billion, with stocks from the consumer discretionary and financial sectors accounting for 26% and 20% of the value of the portfolio respectively. By hedge fund standards, the fund runs a fairly concentrated portfolio, reporting stakes in only 23 companies at the end of June and its top ten holdings represented 67% of the value of its portfolio.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 118% since then and outperformed the S&P 500 Index by over 60 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

Hawaiian Holdings, Inc. (NASDAQ:HA), the holding company of Hawaiian Airlines, has been one of the best performing airline sector stocks over the last five years, having more than quadrupled in value during that period. However, the worse-than-expected fiscal 2014 fourth quarter numbers that the company reported in late January, along with the lower guidance it projected for the first quarter of fiscal 2015 caused its stock to slump heavily. Even though the stock has recovered since then, it still trades down by more than 5% year-to-date. During the second quarter, when the stock moved up by 7.8%, its ownership among the hedge funds we track climbed up by three to 24 and the aggregate value of hedge funds’ holdings in the company saw an impressive rise of 49.4% to $241.32 million.

Looking at the insider transactions in the company, we see that Mr. Hirzel, who also serves as an Independent Director at the company, last reduced his stake in the company on September 17, on the same day that President and CEO Mark B Dunkerley sold 5,000 shares at a weighted average price of $25.50 per share, reducing his holding in the company down to slightly over 1.0 million shares. After Hirzel Capital, Gilchrist Berg‘s Water Street Capital and Joel Greenblatt‘s Gotham Asset Management were the largest shareholders of Hawaiian Holdings, Inc. (NASDAQ:HA) in our database at the end of June, having initiated their stakes in the April-June period by acquiring 1.51 million shares and slightly above 1.0 million shares, respectively.

For the second quarter of 2015, Hawaiian Holdings reported EPS of $0.61, which came in-line with analysts’ expectations. However, the revenue of $571.29 million that the company reported for the quarter missed analysts’ expectations by almost $7 million. In the past few months airline stocks have been hammered on fears that an increase in capacity and the resultant fall in airfares will drive down the margins of airline companies. Even though Hawaiian Holdings’ stock has managed to recover some lost ground since late-January, analysts and experts are still wary of its future trajectory, as can be gauged from their recent calls on the stock. On August 4, analysts at Morgan Stanley reiterated their ‘Underweight’ rating on the stock and reduced their price target on it to $25 from $26. With one of its largest shareholders reducing its stake in the company at a rapid rate and analysts not showing conviction in the company, we believe that the stock of Hawaiian Holdings may be grounded for the time being.

Disclosure: None