John H. Lewis’ Osmium Partners revealed in a filing with the SEC last week that it has trimmed its stake in its largest holding, Rosetta Stone Inc (NYSE:RST) by about 7%, selling 148,500 shares in a number of transactions in 2015, the majority of which took place in early March. After the sales, Osmium holds 1.98 million shares, representing a 9.3% activist stake in the company.
Osmium Partners is a value-based long/short fund founded in 2002 by Lewis. The fund invests primarily in small-cap companies with market values of less than $1 billion, particularly in undervalued companies with strong but misunderstood business models. The fund maintains a small, concentrated equity portfolio, with 23 long positions as of the end of 2014, with the fund’s top five picks accounting for over 50% of the value of the portfolio. Moreover, 67% of the fund’s equity portfolio was invested in tech stocks.
Leading that portfolio was Rosetta Stone Inc (NYSE:RST), which accounted for 15.20% of Osmium’s portfolio at the end of 2014, remaining the fund’s top pick for the second straight quarter. Its 2.13 million shares at the time were valued at $20.78 million. While gross margins are high, sales of the company’s language learning software dissapointed investors for much of 2014, which led to a 20.65% loss on the year. Shares are also down a hefty 66.94% since its IPO.
Despite that, there is a lot to like about the company, which looks very undervalued in a number of key metrics. Most notable is the Enterprise-Value-to-Sales (EV/Sales) ratio of just 1.2x, well below the education industry average of 3.7x. Rosetta Stone Inc (NYSE:RST) reports its fourth quarter results on Wednesday, with David Nierenberg of Nierenberg Investment Management likely to be one of the most interested parties. Nierenberg owns around 1.51 million shares as of the end of 2014; the $14.78 million stake amasses 19.66% of its equity portfolio, which is the largest share among the funds that we track.
Nierenberg last summer welcomed the news that Osmium had changed its stake in Rosetta Stone from passive to activist, and hoped the fund would bring the same passion to guiding Rosetta Stone that it had shown in some of its other activist positions of late.
Osmium’s second most valuable position at the end of the year was in Tucows Inc. (USA) (NASDAQ:TCX), a Toronto, Ontario-based provider of domain registration and reselling, which operates a number of different brands including OpenSRS, Hover, and Ting. Osmium had an $18.64 million stake in Tucows Inc. (USA) (NASDAQ:TCX) consisting of 962,300 shares, which was down by 60,800 shares from the previous quarter. Osmium was also the top investor in Tucows among funds we track, followed by Jim Simons’ Renaissance Technology with 615,100 shares.
Tucows Inc. (USA) (NASDAQ:TCX) closed out a very strong three-year run at the end of 2014, rising from $3.04 to $19.30 during that time, a 542% increase. Osmium has benefited from that run for the last two years, opening a position of 189,100 shares in the first quarter of 2013 and building that to just over 1.0 million shares by the end of the third quarter of the same year. Tucows Inc. (USA) (NASDAQ:TCX) is down slightly this year after missing fourth quarter earnings estimate. Earnings per Share (EPS) came in at $0.16, well below estimate of $0.21.
Osmium’s third pick was ePlus Inc. (NASDAQ:PLUS), with the fund holding 171,900 shares worth $13.01 million at the end of 2014, a decrease of 11% from the previous quarter. ePlus Inc. (NASDAQ:PLUS) is another stock in the midst of a terrific three-year run, up slightly more than 200% since the beginning of 2012. Another longtime shareholder of ePlus, Eric D. Hovde’s Hovde Capital, recently sold some more of its stake, taking profit from its lucrative investment.
Lewis has previously cited some of the positives he saw in ePlus Inc. (NASDAQ:PLUS). Among them are the company’s EBITDA margins of 7.2% compared to just 4% among its peers, and the opportunities for the company to grow, with nearly $300 million in cash and credit. A strong earnings report in February sent shares rising by 15%, as the company reported adjusted earnings of $1.64, which beat the estimate of $1.41.
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