Shah Capital Management’s Top Stock Picks For 2016

Shah Capital Management is a Raleigh, North Carolina-based activist hedge fund. Although the fund is quite small in size when compared to other investors, it owns activist stakes in several companies. Shah Capital was founded in 2005 by Himanshu H. Shah, a former Vice President and Senior Portfolio Manager at UBS. According to the fund’s latest 13F filing submitted with the US Securities and Exchange Commission (SEC) for the reporting period ended December 31, its equity portfolio was worth $107.36 million and consisted of 12 positions. The filing also revealed stocks from the industrial and technology sectors amassed the largest part of the fund’s equity portfolio and that its top five equity holdings accounted for over 75% of the value. Since the fund is heavily invested in its top five picks, in this post we will be focusing on these stocks and evaluate their performance in the past few months.

We track prominent investors like Himanshu H. Shah because our research has shown that historically their stock picks delivered superior risk-adjusted returns. The 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points per month in our backtests covering the period between 1999 and 2012 (see the details here).

#5 Coeur Mining Inc (NYSE:CDE)

– Shares Owned by Shah Capital Management (as of December 31): 3.74 million

– Value of Holding (as of December 31): $9.26 million

Let’s start with silver mining company Coeur Mining Inc (NYSE:CDE), in which Shah Capital Management boosted its stake by 69% during the fourth quarter after having increased it by 52% during the previous quarter. Although the company lost over 50% of its market capitalization in 2015 largely due to the fall in silver prices, the over 10% rise that silver has had in 2016 has helped the stock to change its trajectory as it trades with year-to-date gains of over 40%. Currently, silver is trading at around $15.37 per ounce and experts believe that it needs to go above at least $16.50 for Coeur Mining to sustain its operational costs. Coeur Mining Inc (NYSE:CDE) posted a loss of $0.27 per share, missing the estimates of a loss of $0.17 per share, but its revenue of $164.20 million topped the expectations of $158.14 million. Eric Sprott‘s Sprott Asset Management reduced its stake in Coeur Mining by 25% to 255,800 shares during the October-December period.

#4 Genworth Financial Inc (NYSE:GNW)

– Shares Owned by Shah Capital Management (as of December 31): 3.15 million

– Value of Holding (as of December 31): $11.74 million

Genworth Financial Inc (NYSE:GNW) was a new addition in Shah Capital Management’s portfolio during the fourth quarter.  After declining by over 55% in 2015, shares of Genworth Financial Inc (NYSE:GNW) have fallen by 48% so far in 2016. Most of the stock’s decline this year came after the company reported its fourth-quarter numbers and announced that it would separate its struggling LTC business and suspend sales of life and fixed annuity products. For the fourth quarter, the company declared a loss of $0.17 per share on revenue of $2.16 billion, versus analysts’ expectations of $0.21 in earnings per share on revenue of $2.17 billion. Following the earnings report, Moody’s downgraded the company’s senior unsecured credit rating to Ba3 from Ba1, which put additional pressure on the stock. On February 6, the company announced that it would be laying off 330 of its employees in a cost-cutting move. Richard S. Pzena‘s Pzena Investment Management also increased its stake in Genworth Financial by 6% to 8.17 million shares during the fourth quarter.

#3 Avon Products, Inc. (NYSE:AVP)

– Shares Owned by Shah Capital Management (as of December 31): 2.93 million

– Value of Holding (as of December 31): $11.86 million

Avon Products, Inc. (NYSE:AVP) became one of Shah Capital Management’s top picks during the third quarter of 2015, when the fund made an over tenfold increase in its stake. Amid a nearly 25% jump of Avon Products, Inc. (NYSE:AVP)’s stock during the fourth quarter, the fund inched up its stake in the company by 4%. Most of the gains in the fourth quarter  were registered amid rumors that the struggling cosmetic manufacturer and marketer has finally found an investor after spending months searching for a suitor. On December 17, the company said Cerberus Capital Management LP, a New York-based private equity firm, would acquire a 16.6% stake in the company and buy 80.1% of its North American business in a $605 million deal. At the beginning of 2016, shares of Avon Products saw a dramatic fall, but have recovered after the company reaffirmed its full-year outlook on January 21. Donald Yacktman‘s Yacktman Asset Management reduced its stake in the company by 8% to nearly 35 million shares during the fourth quarter.

#2 UTStarcom Holdings Corp (NASDAQ:UTSI)

– Shares Owned by Shah Capital Management (as of December 31): 5.65 million

– Value of Holding (as of December 31): $14 million

Though Shah Capital Management almost halved its stake UTStarcom Holdings Corp (NASDAQ:UTSI) during the fourth quarter, the company remained its second-largest holding at the end of December. Mr. Shah has been a director on the board of UTStarcom Holdings Corp (NASDAQ:UTSI) since 2013 and became the Chairman of the board in 2014. In a regulatory filing last August, it was revealed that Shah Capital Management had signed an agreement with China-based strategic investor Gu Guoping to sell its entire stake in UTStarcom Holdings Corp at $6.08 per share. The fund is expected to sell its remaining stake in the company this quarter. On January 11, UTStarcom Holdings Corp named Tim Ti as the new CEO of the company and on January 15 it appointed Zhaochen Huang as its new COO. Analysts believe Gu Guoping is in the process of acquiring a majority stake in the company and may even take it private.

#1 China Yuchai International Limited (NYSE:CYD)

– Shares Owned by Shah Capital Management (as of December 31): 3.16 million

– Value of Holding (as of December 31): $33.96 million

Amid a 13% decline registered by China Yuchai International Limited (NYSE:CYD)’s stock during the fourth quarter, Shah Capital Management increased its stake by 10%. The fund went activist on the company in 2013 and sent a letter to its Board urging it to acquire a 100% stake in its main operating subsidiary Guangxi Yuchai Machinery Company and to sell its entire stakes in a real estate and a consumer electronics distribution company. Though the board of China Yuchai International Limited (NYSE:CYD) didn’t comply with the requests made by the fund, Shah Capital Management remains one of the largest shareholders of the company citing that the company is undervalued at current levels. Shares of China Yuchai International Limited have lost 10% since the beginning of 2016 and are trading cheap at a trailing price to earnings ratio of 4.44. However, several analysts who track the stock justify the cheap valuation it trades at by citing the weakness in the overall Chinese economy and the uncertainty regarding the company’s performance. Jim Simons‘ Renaissance Technologies boosted its stake in China Yuchai International more than fivefold to 140,992 shares during the last quarter.

Disclosure: None