Prescott Group Capital Management is a Tulsa, Oklahoma-based hedge fund founded by Phil Frohlich in 1992. The fund currently manages over $650 million of investors’ money and primarily invests in small- and mid-cap equities. According to the fund’s brochure, Prescott doesn’t restrict itself by following any particular investment style; depending on the prevailing conditions, it invests either in growth or value stocks or a combination of both. However, the fund does employ a bottom-up approach to stock selection. Prescott Group Capital Management recently filed its 13F with the SEC for the reporting period of June 30. The filing revealed that at the end of June the fund’s U.S-traded public equity portfolio was worth $502.63 million, 34.25% of which was invested in its top ten holdings. Prescott has a fairly diversified portfolio, with stocks from the information technology, consumer discretionary, and industrial sectors accounting for 25%, 15%, and 13% of its public equity portfolio, respectively. Air Transport Services Group Inc. (NASDAQ:ATSG) and Nature’s Sunshine Prod. (NASDAQ:NATR) continued to remain Prescott’s top two holdings by the end second quarter, and they were followed by Servicesource International Inc (NASDAQ:SREV), which climbed up two ranks from the end of the first quarter to become Prescott’s third-largest holding. Let’s look at these three stocks in detail and try to gauge what made them Prescott’s top stock picks.
Prescott Group Capital Management is just one of more than 700 hedge funds that we have in our database, whose equity portfolios we collate quarterly as part of our small-cap strategy. Even though most smaller investors believe that tracking 13F filings is a fruitless endeavor because they are filed with a delay of a maximum of 45 days after the end of a calendar quarter, the results of our research prove that is not the case. To be on the safe side, we used a delay of 60 days in our backtests that involved the 13F filings of funds between 1999 and 2012 and we still managed to gain an annual alpha in the double digits. Moreover, since the official launch of our strategy in August 2012, our small-cap strategy has obtained returns of more than 123%, beating the S&P 500 Total Return Index by greater than 65 percentage points (see the details).
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Prescott diluted 15% of its stake in its top pick from the first quarter, Air Transport Services Group Inc. (NASDAQ:ATSG). However, the 5.27 million shares the fund continued to own at the end of June coupled with a 13.77% rise in Air Transport Services Group Inc. (NASDAQ:ATSG) during the April-June period ensured that the company remained Prescott’s largest holding at the end of second quarter. As of June 30, Prescott’s stake in the aircraft leasing and maintenance company was worth $55.28 million. On August 5, Air Transport Services Group Inc. (NASDAQ:ATSG) reported its second quarter earnings which came in better than expected. EPS for the quarter rose 13% year-on-year to $0.16, while revenue saw a modest 1% year-over-year decline to $148 million. With oil prices declining substantially during the past few weeks, analysts are expecting the company to have a marked improvement in its performance in the coming months. On August 7, analysts at Imperial Capital reiterated their ‘Outperform’ rating on the stock while upping their price target to $14 from $13, which represents an over 40% upside to the stock’s current trading price. Prescott Group Capital Management was not the only hedge fund to reduce its stake in Air Transport Services Group Inc. (NASDAQ:ATSG), Marc Lehmann‘s Riverloft Capital Management also reduced its stake by 44% to 100,000 shares during the April-June period.
Prescott didn’t made any changes to its stake in Nature’s Sunshine Prod. (NASDAQ:NATR) during the second quarter. As of June 30, the fund continued to own over 1.86 million shares of the company valued at around $25.65 million. The company reported its second quarter earnings on August 10. EPS for the quarter came in at $0.12 on revenue of $81.2 million, compared to EPS of $0.22 on revenue of $92.8 million it reported for the same quarter last year. Excluding for the planned restructuring charges the company had to bear during the quarter, EPS for the second quarter was $0.19. On April 9, analysts at imperial capital initiated a coverage on the stock with an ‘In-line’ rating and a price target of $15. Nelson Obus‘ Wynnefield Capital, which held over 1.85 million shares of the company at the end of first quarter, has been continuously buying the company’s shares since May and according to its latest regulatory filing on July 27, owned 2 million shares of the company.
Moving on to Prescott’s third largest holding, Servicesource International Inc (NASDAQ:SREV). The fund bought 258,164 shares of the company during the second quarter and at the end of June held over 3.68 million shares worth $20.173 million. Shares of the cloud services provider saw a massive 76.45% rise during the April-June period fueled majorly by the company’s first quarter earnings beat in early May. The company is currently embroiled in a lot of controversies, on July 14, Law offices of Howard G. Smith announced that it is investing claims of Servicesource International Inc (NASDAQ:SREV) and its officers’ possible violation of federal securities law on behalf of the company’s shareholders. This announcement came in a day after the law firm Levi & Korsinsky, LLP announced that it has commenced a class action lawsuit on behalf of Servicesource International Inc (NASDAQ:SREV) ‘s shareholders who purchased shares between January 22, 2014 and May 1, 2014. The company reported its second quarter earnings on August 6 which again came above analysts’ expectations. Although the company reported an EPS loss of $0.16, adjusted for restructuring costs and stock option expense the EPS loss was only $0.02. One of the most renowned hedge funds, Chuck Royce‘s Royce & Associates sold its entire stake of 199,061 shares of the company during the second quarter.
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