Orange Capital’s Top Picks Ahead of Its Closure

When reports of liquidity drying up in the credit market started emerging last year, most large investors dismissed it as cyclical phenomena and blamed other market players for overreacting. However, in the last few months, we have seen concerns being raised from several quarters about this liquidity crisis. Of late the situation has become so dire that many high-yield and distressed debt-focused fund are finding it hard to sell their assets without causing a mayhem in the market. The latest casualty of this deterioration in market liquidity is a New York-based event-driven activist hedge fund Orange Capital. In February, the fund led by Daniel Lewis sent a letter to its investors informing them that it is shutting shop after 10 years of operations. In the letter, the management of the fund also provided a brief explanation as to why it is closing the fund saying, “We believe that credit investing through traditional, liquid hedge fund strategies will prove challenging for investors as the credit cycle turns. This includes our own hedge fund structure”.

Though Orange Capital’s flagship fund has delivered annualized returns of 9.7% since its inception in mid-2005, it failed to generate positive returns last year. According to Reuters, the fund ended 2015 down by 7.4% net of fees. Insider Monkey’s own analysis of Orange Capital’s 13F holding shows in companies worth at least $1 billion shows that 11 long positions held by the fund during 2015 delivered a negative weighted average return of 11.4 % for the year. The fund recently submitted its 13F filing with the SEC, revealing a US equity portfolio worth nearly $992 million, as of December 31. Since this is going to be the last 13F filing submitted by Orange Capital, in this post we will take a closer look at the top five stocks it was bullish on going into 2016.

At Insider Monkey, we track more than 700 hedge funds, whose 13F filings we analyze as part of our small-cap strategy. Our research has shown that imitating a portfolio that includes the 15 most popular small-cap stocks among hedge funds can outperform the market by as much as 95 basis points per month on average (see more details here).

#5 Northstar Realty Finance Corp (NYSE:NRF)

– Shares owned by Orange Capital (as of December 31): 3.08 million

–Value of Holding (as of December 31): $52.5 million

Let’s start with Northstar Realty Finance Corp (NYSE:NRF), in which Orange Capital reduced its stake by 24% during the fourth quarter. The commercial real estate company had an extremely busy fourth quarter as immediately after spinning off its European real estate business into a separate publicly traded entity, Northstar Realty Europe Corp (NYSE:NRE), the company conducted a one-for-two reverse stock split of its common stock. Shares of Northstar Realty Finance Corp (NYSE:NRF) have declined gradually since this reverse stock-split materialized. Although the stock was trading deep in the red year-to-date till a few days ago, it has recouped some losses since the company reported its fourth quarter earnings and it is currently down by 10.84% since the beginning of 2016. Along with its earnings release, the company also announced that it is reducing its quarterly dividend to $0.40 per share, which represents an annual dividend yield of over 12% at its current stock price. In January, Jonathan Litt’s Land & Buildings sent a letter to the company urging it to recombine with NorthStar Asset Management Group Inc (NYSE:NSAM), following which the company added a new independent director to its board to evaluate this alternative.

#4 Howard Hughes Corp (NYSE:HHC)

– Shares owned by Orange Capital (as of December 31): 519,004

–Value of Holding (as of December 31): $58.73 million

Orange Capital increased its stake in Howard Hughes Corp (NYSE:HHC) by 174% during the fourth quarter, which led the company to jump several spots in the fund’s equity portfolio and emerge as its fourth-largest equity holding at the end of December. Though shares of Howard Hughes Corp (NYSE:HHC) have declined by over 35% since last April, they recently started rallying in anticipation of the company’s fourth quarter numbers and currently trade down 13.3% for 2016. The company reported EPS of $0.59 on revenue of $229.40 million for the fourth quarter versus analysts’ estimates of a loss of $0.09 per share on revenue of $124.40 million. Both of the two major research firms that track the stock currently have a ‘Buy’ rating on it with an average price target of $180. Kenneth Squire‘s 13D Management also boosted its stake in the company by 375% to 159,922 shares during the fourth quarter.

#3 American Capital Ltd. (NASDAQ:ACAS)

– Shares owned by Orange Capital (as of December 31): 4.77 million

–Value of Holding (as of December 31): $65.88 million

American Capital Ltd. (NASDAQ:ACAS) is the only stock in this list in which Orange Capital reduced its stake by 32% during the fourth quarter. Since American Capital Ltd. (NASDAQ:ACAS)’s stock witnessed a spectacular rally, rising by 28.7%, during the fourth quarter it looks like the fund reduced its stake to book some profits rather than due to a change in its conviction on the stock. Even though the asset management and private equity firm missed the earnings expectations for its latest quarter recently, its shares have had a strong rally in the past few days and currently trade up 1.23% year-to-date. While the Street had projected the company to report EPS of $0.31 on revenue of $169.3 million, American Capital Ltd. declared EPS of $0.24 on revenue of $173 million for the quarter. Along with its earnings release, the company added that it bought back 20.7 million of its shares during the fourth quarter for $298 million. Overall, the company has bought back 13.8% of its outstanding shares in the fiscal year 2015, thereby, increasing the book value of its remaining shares by $0.75 apiece. Billionaire Paul Singer‘s Elliott Management initiated a stake in the company during the fourth quarter by purchasing 12.26 million shares.

#2 Nexstar Broadcasting Group, Inc. (NASDAQ:NXST)

– Shares owned by Orange Capital (as of December 31): 1.2 million

–Value of Holding (as of December 31): $70.31 million

Amid a 24% increase registered by Nexstar Broadcasting Group, Inc. (NASDAQ:NXST)’s stock during the fourth quarter, Orange Capital raised its exposure to the company by 14%. However, considering the over 20% decline that Nexstar Broadcasting Group, Inc. (NASDAQ:NXST)’s stock has had this year, retrospectively it doesn’t look like the fund made a wise decision by increasing its stake in the company. The company recently reported its fiscal 2015 fourth quarter numbers, declaring EPS of $0.86 on revenue of $276.77 million. For the same quarter of the previous financial year, the company reported EPS of $0.96 on revenue of $192.80 million. On January 27, the company announced that it had entered into a definitive agreement to acquire Media General Inc (NYSE:MEG) in a $4.6 billion accretive cash-and-stock deal. Not taking into account this deal, Nexstar Broadcasting Group’s stock currently trades at a free cash flow yield of nearly 20% and forward P/E of 12.80, which analysts believe is a really low valuation for a company that generates a significant amount of free cash and is growing rapidly. Quincy Lee‘s Ancient Art, which was among the best performing hedge funds in 2015 covered by Insider Monkey, reduced its stake in the company by 17% to 352,305 shares during the October-December period.

#1 AMAYA INC (NASDAQ:AYA)

– Shares owned by Orange Capital (as of December 31): 5.99 million

–Value of Holding (as of December 31): $75.44 million

Though its shares decline by 30.8% during the fourth quarter, Orange Capital increasing its holding in the company by 40% helped AMAYA INC (NASDAQ:AYA) to emerge as the fund’s top stock pick going into 2016. Amid a broad based sell-off in the equity markets this year, shares of the Quebec-based gaming company have managed to buck the trend led by the back-to-back good news and currently trade up nearly 15% year-to-date. On February 1, the company’s Chairman and CEO, David Baazov, announced that he intends to take the company private by making an all-cash proposal of acquiring all of the company’s outstanding shares at C$21 (US $15.63) per share. A day after that, the State of New York passed an online poker bill out of a committee hearing. Since this was the first time that such a bill has been passed since the topic of Internet gaming regulation was introduced in 2013, investors feel that Amaya with its leading brands ‘PokerStars’ and ‘Full Tilt Poker’ will be a major beneficiary of the legalization of online poker going forward.

Disclosure: None