These Hedge Funds’ Latest Moves Suggest Two Stocks Worth Buying

The U.S. equities have been on a recovery path for the last week or so, which serves as a strong indicator that most market participants will pass over the so-called correction. The following article will discuss the stances of two elite investors within our database on to two seemingly struggling companies. Sandell Asset Management, founded by Tom Sandell, recently commented on Board Changes at Ethan Allen Interiors Inc. (NYSE:ETH), which came after the investor’s nomination of six candidates to the company’s Board of Directors. It is worth mentioning that the firm currently owns 1.56 million shares of the manufacturer of home furnishings, accounting for 5.5% of its outstanding stock. Meanwhile, Robert Rodriguez and Steven Romick’s First Pacific Advisors LLC disclosed a new stake of 3.17 million shares in Esterline Technologies Corporation (NYSE:ESL) via a 13G filing with the SEC. The freshly-acquired stake represents 10.7% of the company’s outstanding stock.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see more details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

Before proceeding with Tom Sandell’s comments on Ethan Allen Interiors’ Board Changes, we will present a concise introduction to his investment firm. Sandell Asset Management is an alternative asset management firm started by Tom Sandell back in 1998. The firm employs a corporate event-driven, multi-strategy investing approach, and primarily focuses on special situations and credit opportunities. Just recently, the New York-based investment firm was successful in settling two new candidates on Viavi Solutions Inc. (NASDAQ:VIAV)’s Board of Directors. According to the 13F filing for the June quarter, Sandell Asset Management oversees an equity portfolio with a value of $942.48 million.

On October 1, Ethan Allen Interiors Inc. (NYSE:ETH) announced that Tara I. Stacom was appointed to its Board of Directors, while two of its directors, Frank Wisner and Kristin Gamble, stepped down prior to the company’s 2015 Annual Meeting of Stockholders. Sandell Asset Management reckons that this is an applaudable effort to solve the bountiful governance issues that have been previously pinpointed by the investment firm. Even so, Tom Sandell and his team doubt the ability of Tara Stacom and another freshly-appointed director, Domenick Esposito, to “counter-weight to the will” of Chairman and CEO Farooq Kathwari. Let us remind you that a recently-revealed public filing outlined Sandell Asset Management’s belief that Ethan Allen Interiors had greatly underperformed its peers, mainly owning to the poor leadership of Faroow Kathwari and the company’s Board. Even more to that, the investor seems to be troubled by the CEO’s new employment agreement with a five-year term, including two one-year extensions. The hedge fund sentiment on the manufacturer of home furnishings did not change by much during the second quarter, as the number of hedge funds with positions in the stock (among those that we track) declined to 13 from 14 quarter-over-quarter. At the same time, these hedge funds amassed 24.00% of the company’s shares as of June 30, while the value of their investments decreased by only $562,000 to $183.24 million. Royce & Associates, founded by Chuck Royce, is the top shareholder of Ethan Allen Interiors Inc. (NYSE:ETH) within our database, owning 3.07 million shares.

See the full text of the letter here:

Sandell Asset Management Letter to ETH

Let’s now move on to First Pacific Advisors and its new addition, Esterline Technologies Corporation.

FPA is a Los Angeles-based value-oriented investment management firm, currently overseen by Robert Rodriguez and Steven Romick. First Pacific Advisors has roughly $33 billion in assets under management across six equity strategies and one fixed-income strategy. As stated by its latest 13F filing, the investment management firm an equity portfolio worth $12.27 billion.

Esterline Technologies Corporation (NYSE:ESL), a supplier of aerospace parts, has had a rough year in terms of both stock and financial performance. Its stock has lost nearly 29% since the beginning of the year, but the management has been working on increasing efficiencies so as to achieve a much-needed turnaround. On September 3, the company released its earnings report for the third fiscal quarter of 2015 ended July 31. Esterline Technologies Corporation posted consolidated revenue of $496.2 million, compared to $506.3 million reported in the same quarter a year ago. At the same time, the company’s GAAP earnings from continuing operations amounted to $30.2 million, compared to $39.8 million reported a year ago. Esterline Technologies Corporation anticipates its sales growth to keep facing downward pressure, considering that “most commercial aerospace production rates have stabilized and energy and general industrial markets are still under pressure”. In the meantime, the stock became more appealing for the hedge fund industry during the second quarter, as the number of top money managers invested in the company increased to 22 from 17 during the three-month period. However, the aggregate value of positions decreased to $558.41 million from $654.57 million. The hedge funds monitored by Insider Monkey still stockpiled 19.00% of the company’s outstanding common stock as of June 30. Relational Investors reported owning 2.15 million shares of Esterline Technologies Corporation (NYSE:ESL) through the 13F filing for the June quarter.

Disclosure: None