Paul J. Isaac has managed Arbiter Partners Capital Management since he founded the New York-based fund in 2001. From then through 2011, the fund returned an impressive average of 21% annually. The value-oriented investor has been actively investing both for himself and others for over 35 years, in addition to serving on several non-profit boards, and boasting over 18 years of managerial experience in the securities sector.
While many of the most valuable positions in Mr. Isaac’s portfolio are devoted to call and put options on large-cap companies like Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN), and Tesla Motors Inc (NASDAQ:TSLA), we like his fund and include it in our database for the diversity of small-cap long positions he maintains in the back-end of his portfolio. Our extensive research has shown that the top 15 collective small-cap picks of funds we track, like Mr. Isaac’s, significantly outperform not only their best large-cap picks, but the market as a whole as well. In our back tests the top small-cap stocks among hedge funds beat the market by an average of nearly a percentage point per month between 1999 and 2012. We have also started forward testing the performance of these stocks at the end of August 2012. Since then, this strategy has returned 132 percentage points through March 11 of this year and beat the market by nearly 80 percentage points (see the details).
Let’s start with Isaac’s large put positions, the first two of which constitute the most-valuable positions in his equity portfolio. Those positions are in Tesla Motors Inc (NASDAQ:TSLA) and Amazon.com, Inc. (NASDAQ:AMZN)respectively, which also happen to be two of the top five stocks in which the hedge funds we track were buying protection against last quarter. Netflix, Inc. (NASDAQ:NFLX)also made that list, and Isaac also held a large number of put options on the video-streaming service as well.
As Isaac is a value investor, he must be thinking that those three stocks are extremely overpriced. Historically value stocks outperformed growth stocks like on an average return basis. Unfortunately this doesn’t mean that value stocks always outperform growth stocks like Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN), and Tesla Motors Inc (NASDAQ:TSLA). Usually it is the other way around. Growth stocks outperform value stocks until the bubble pops which is why value investing isn’t a comfortable strategy for most investors. This also explains why value investing still keeps working today. Investors logically understand that value stocks outperform growth stocks but they don’t have the discipline to stick to this strategy.
Isaac seems to be using put options to ease the pain of shorting growth stocks like Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN), and Tesla Motors Inc (NASDAQ:TSLA). We usually don’t know when these stocks with sky-high valuations come down to earth so shorting them is very tricky. Most value investors choose to short a basket of growth stocks. Isaac seems to be going in the opposite direction. Amazon’s forward P/E is a sky-high 163, while Netflix’s is 76. Tesla’s forward P/E is a more optimistic 46. Its price/sales ratio is 7.5 whereas BMW has a P/S ratio of 0.95.
We’ll take a look now at Mr. Isaac’s top long positions heading into 2015. At the head of the list was his investment in Capital Senior Living Corporation (NYSE:CSU), which amounted to 1.83 million shares valued at $45.59 million at the end of 2014. The position was increased slightly, by 2%, during the fourth quarter. That position is also the largest among the hedge funds we track and amounts to 6% of Capital Senior Living’s outstanding common stock. Billionaire Jim Simons’ quant fund Renaissance Technologies having the second largest position, at just under 800,000 shares.
Capital Senior Living Corporation (NYSE:CSU) recently purchased two high-occupancy senior living communities, adding them to a portfolio of over 100 communities that already made it the largest operator of residential housing for seniors in the United States. Capital Senior Living has consistently improved its revenue and adjusted EBITDAR over the past five years, at a rate of 17.9% annually, while it’s adjusted cash flow from operations per share has improved by 23.5% annually over the same period. The company believes it is well-positioned to further increase shareholder value in the future thanks to a strong balance sheet, an improving economy and housing market, and the ability to make further accretive acquisitions.
Mr. Isaac’s second-most valuable long position was in Greif, Inc. (NYSE:GEF), a packaging company which Mr. Isaac described as one with a nice long-term track record during a 2012 interview with Barron’s. Mr. Isaac maintained a 906,700 share position at the end of 2014, valued at $44.67 million. That was an increase to the position of 6% during the fourth quarter, and nearly 50% over the course of 2014, as Mr. Isaac continues to show faith in Greif.
Greif, Inc. (NYSE:GEF) insiders are showing the same bullish sentiment towards the stock, as several purchases have been made by company insiders over the past few weeks after more than two-and-a-half years of no insider purchasing activity. This follows a dip in shares of more than 21% over the past calendar year, and could indicate insiders believe the bottom has been reached and the company is now undervalued.
Disclosure: None
