Mark Weissman, Adam Cohen and David Coleto’s Caspian Capital Partners recently filed its 13F with the SEC for the reporting period of June 30. Among the high degree of turnover in the fund’s public equity portfolio during the second quarter, we noticed that three of its new moves during the period were bearish bets on companies, in the form of positions of put options. Included among those was one very bearish call, which is now by far the largest position in its public portfolio in terms of value. We’ll take a look at those moves and try to find the reasons behind them in this article, with the companies in question being Nationstar Mortgage Holdings Inc (NYSE:NSM), Encore Capital Group, Inc. (NASDAQ:ECPG), and United States Steel Corporation (NYSE:X).
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Let’s start with Caspian Capital’s most bearish bet, on Nationstar Mortgage Holdings Inc (NYSE:NSM). The fund built a collection of put options underlying just under 11.64 million shares of the home financing company during the quarter, with the position having a value of $195.49 million on June 30, according to the filing. That amassed 36.68% of the value of the fund’s entire public equity portfolio, showing the fund has a lot riding on the position and a firm belief in said position. Without knowing the dates or strike prices of the options in question, it’s difficult to tell whether the position has been, or will be, a success for the fund. What we do know is that the shares of Nationstar Mortgage Holdings Inc (NYSE:NSM) endured a poor second quarter, down by over 32% during that period, nearly totaling its 35% year-to-date loss. That performance proved ill for at least one of its bullish investors, Michael Novogratz’s Fortress Investment Group, which went through a shakeup which included the departure of the former co-manager of the fund, Jeff Feig, following its poor second quarter results, with Nationstar Mortgage among its top picks.
However, the shares of the company have rebounded slightly in the third quarter, up by a little over 8% so far in July. Those gains have come entirely in the past few trading days, leading up to the company’s second quarter earnings release on July 30, which will surely be of immense interest to Caspian. It was the company’s most recent earnings report, on May 5, that toppled its shares, after the company reported a shocking $0.53 per share loss during the first quarter, and a 15% drop in revenue to $382 million. There were some positives to be found in the report however, including a 37% year-over-year increase in adjusted cash flow. In addition to Fortress Investment, which had by far the largest position in the company as of March 31 among the funds we track, with ownership of 67.58 million shares, Robert Joseph Caruso’s Select Equity Group was another fund betting on the stock, with a position of 3.69 million shares, a position which had been increased by 48% during the first quarter.
Next up is Encore Capital Group, Inc. (NASDAQ:ECPG), in which Caspian held a new position of put options underlying 745,000 shares, with the position having a reported value of $31.84 million as of June 30. Like Nationstar, Encore Capital Group also suffered an early May dip upon the release of its own first quarter earnings report. In contrast however, shares rebounded with a very strong June. Shares of the debt collector are down slightly in the third quarter however. Despite its revenue and earnings meeting expectations in its May 7 earnings report, shares dropped by about 5% the following day, partly because of a downgrade to ‘Hold’ from Zacks. With shares soaring in June, Zacks downgraded the stock again, to ‘Sell’ in early July. Interestingly, there were a number of insider purchases of shares by company executives in early June, just before the spurt in their price, which exemplifies why we track and report on insider trading activity, as such purchases have been correlated with stronger equity returns in research on the subject. Among other purchases, President and CEO Kenneth Vecchione purchased 4,000 shares on June 8. Emanuel J. Friedman’s EJF Capital held the largest position in Encore Capital Group, Inc. (NASDAQ:ECPG) within our database as of March 31, with it consisting of 1.36 million shares, though the position was trimmed by 20% during the first quarter.
Lastly is United States Steel Corporation (NYSE:X), in which Caspian Capital’s position consists of put options underlying 292,000 shares, with a reported value of $6.02 million. A top small-cap pick of Ray Dalio, United States Steel Corporation (NYSE:X) appears to be the surest bet of Caspian without knowing the dates or strike prices of its positions, as shares have very steadily declined since the beginning of June amid weakening commodity prices and fears over a slowing Chinese economy. With steel trading at a six-year low, United States Steel has shed nearly a third of its value, just under 32%, since the beginning of June. The company will report its second quarter earnings on July 29, coming off first quarter earnings that severely disappointed, as the company lost $75 million and sales fell by 26%. Bullish investors like Ken Griffin and Cliff Asness, who held positions of 5.54 million shares and 4.04 million shares respectively as of March 31, likely had their steely resolve in the company tested following those results.
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