Raging Capital Charges At These Two Stocks, Skewers More Shares

The August stock market correction lowered the valuations of most companies, which makes a potential investment in those stocks more attractive. Just recently, William Martin’s Raging Capital Management revealed two filings regarding two of its positions. In a Schedule 13D filing, the investment firm disclosed an ownership stake of 1.94 million shares in EZchip Semiconductor Ltd (NASDAQ:EZCH), which account for 6.5% of the company’s outstanding shares. This denotes an increase of 1.15 million shares from its position at the end of June. At the same time, a freshly-amended 13G revealed that Raging Capital currently owns 7.48 million shares of ORBCOMM Inc. (NASDAQ:ORBC), accounting for 10.6% of its common stock. This is nearly 2.79 million shares more relative to the position disclosed in the 13F filing for the June quarter. This article will discuss in more detail William Martin’s recent moves and the hedge fund sentiment on each of the stocks.

Raging Capital Management is an investment firm established by its current Chairman and Chief Investment Officer William C. Martin in 2006. The New Jersey-based firm employs a bottom-up stock picking approach, which represents the underlying tool Raging Capital relies on. In its second quarter letter to investors, William C. Martin outlined that there were not so many undervalued, high-quality stocks, and that many valuations were “rich”. Therefore, the recent moves might point to the fact that the aforementioned two stocks represent great buying opportunities at the moment. As stated by its most recent 13F filing with the SEC, Raging Capital Management oversees a public equity portfolio with a market value of $777.32 million as of June 30.

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 spinoffs 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, returning 102% (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.

To begin with, we will discuss Raging Capital Management’s position in EZchip Semiconductor Ltd (NASDAQ:EZCH). Just recently, Mellanox Technologies Ltd. (NASDAQ:MLNX) and EZchip Semiconductor announced a merger agreement under which the former is set to acquire the latter for $25.50 per share in an all-cash deal. However, Raging Capital outlined in the 13D filing that the aforementioned sale price significantly undervalues the potential of the supplier of end-to-end interconnect solutions, and its future prospects. At the same time, the investment firm reckons that EZchip’s management should try to negotiate a new deal with Mellanox, look for other acquirers, or hold back from selling the company entirely. In the meantime, William Martin and his team intend to vote against the above-mentioned deal and are examining all alternatives regarding their investment in the company.

The hedge fund sentiment on the stock did not change significantly during the second quarter, with the number of top money managers invested in EZchip amounting to nine at the end of the quarter, compared to six reported in the prior one. These hedge funds had stockpiled 5.40% of the company’s common stock on June 30, but this figure may be higher at the moment considering Raging Capital’s further investment in the stock. Similarly, the value of these hedge funds’ investments increased to $26.02 million from $16.80 million during the three-month period. Jim Simons’ Renaissance Technologies reported a 277,800-share stake in EZchip Semiconductor Ltd (NASDAQ:EZCH) in its 13F filing for the June quarter.

Let’s now move on to the next page, where we will discuss Raging Capital Management’s position in the other stock.

ORBCOMM Inc. (NASDAQ:ORBC) is a provider of Machine-to-Machine (M2M) communication solutions, which are designed to track, monitor, and control fixed and mobile assets in core vertical markets (e.g. transportation and distribution, heavy equipment, and industrial fixed assets, to name just a few). The shares of the company have narrowed down their year-to-date negative return to nearly 4%, thanks to a recent surge in its stock price triggered by an acquisition. On October 6, ORBCOMM announced the acquisition of the majority of WAM Technologies LLC’s assets. As stated by the company’s press release, WAM is a provider of remote wireless management and control solutions for ocean transport refrigerated containers and other related equipment, and has a significant market share within that niche segment.

Meanwhile, there were 13 hedge funds tracked by Insider Monkey with stakes in ORBCOMM at the end of the second quarter, which accumulated 22.00% of its outstanding shares, compared with 12 registered in the previous one. However, the value of the money poured into the stock decreased to $104.59 million from $105.90 million over the June quarter. Aside from Raging Capital Management, John W. Rogers’ Ariel Investments represents another top stockholder of ORBCOMM Inc. (NASDAQ:ORBC),  with 5.86 million shares.

Disclosure: None