Tontine Asset Management’s Bets on Small-Caps Help Offset Losses

Founded in 1997 by Jeffrey Gendell, Tontine Asset Management was once among the most revered names in the hedge fund Universe. The fund generated an average annual return of 38 percent in the period between 1997, when it was founded, and 2008. It also achieved the feat of doubling investors money within a year during that period not once, but twice – in 2003 and 2005. However, the fortunes of the Connecticut-based asset management firm has been on a downward spiral since the financial crisis of 2008, when most of its funds lost 65% to 75% of their capital. While at one point of time Tontine managed over $10 billion of  investors’ money, its latest regulatory filing shows that the fund’s AUM is now down to under $500 million. The regulatory filings it has submitted in 2016  have also revealed that the fund’s bets on large-cap companies have had disastrous outcomes this year.

Research done by Insider Monkey on Tontine’s 13F holdings in companies worth over $1 billion shows that the 12 long positions held by the fund delivered a weighted average loss of 15.8% during the second quarter of 2016 and have generated a weighted average loss of 35.9% year-to-date. Nevertheless, the funds small-cap picks (companies with market cap of under $1 billion), which constitute a major chunk of its portfolio, have done exceedingly well this year, helping it in offsetting those losses. In this post, we will take a look at Tontine’s top-five equity holdings, which in aggregate amassed 59% of the value of its equity portfolio at the end of second quarter, and will discuss how those stocks have performed this year.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points in our backtests that covered the period between 1999 and 2012 (see the details here).

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#5 Bank of America Corp (NYSE:BAC)

– Shares Owned by Tontine Asset Management (as of June 30): 1.05 Million

– Value of Holding (as of June 30): $13.95 Million

Let’s begin with Tontine Asset Management’s fifth-largest equity holding, Bank of America Corp (NYSE:BAC). During the second quarter, the fund increased its stake in the company by 49%. At the end of June, the banking behemoth announced that its Board of Directors has agreed to hike the quarterly dividend by 50% to $0.075 per share and has also authorized the repurchase of $5 billion in common stock from July 1, 2016 through June 30, 2017. This announcement has helped in driving Bank of America Corp’s stock higher during the quarter, though it still trades down 8.56% year-to-date. According to analysts, the stock can see further upside going forward as it currently trades at a price-to-book multiple of only 0.66 and the company is working hard to its operating efficiency. They also think that the possible rate hike by the Fed is another catalyst that can push the stock higher in the short-term. The number of hedge funds covered by us that were long Bank of America Corp (NYSE:BAC) declined by eight to 102 during the April-June period, while the aggregate value of their holdings in the company came down by 4.3% to $5.28 billion.

#4 LSB Industries, Inc. (NYSE:LXU)

– Shares Owned by Tontine Asset Management (as of June 30): 1.26 Million

– Value of Holding (as of June 30): $15.2 Million

Tontine Asset Management increased its position in LSB Industries, Inc. (NYSE:LXU) by 18% during the second quarter. However, other hedge funds covered by us collectively became less bullish on the company during that time as the ownership of LSB Industries, Inc. among them declined by four to nine and the aggregate value of their holdings in it fell by $5.5 million to $31.68 million. In April last year, the Oklahoma-based manufacturing company reached an agreement with activist investor Starboard Value regarding corporate governance and board composition. However, this agreement didn’t prove fruitful for Starboard Value as LSB Industries, Inc. (NYSE:LXU) reported one bad news after another in the months after it had reached this agreement, causing its stock to fall by more than 75% last year and forcing the famous activist hedge fund to liquidate its entire holdings in the company during the last quarter of 2015. Earlier this year, LSB Industries, Inc. (NYSE:LXU) completed the sale of its climate control business to Sweden’s Nibe Industrier for $364 million.

#3 Citigroup Inc (NYSE:C)

– Shares Owned by Tontine Asset Management (as of June 30): 400,010

– Value of Holding (as of June 30): $16.96 Million

Moving on, Citigroup Inc (NYSE:C) was another major holding in Tontine Asset Management’s equity portfolio in which the fund increased its stake during the second quarter, by 56%. Similar to Bank of America Corp, Citigroup Inc also hiked its dividend recently and now pays a quarterly dividend of $0.16 per share, up 220% from the $0.05 per share quarterly dividend it paid earlier. This hike in dividend coupled with a 11% year-to-date decline in Citigroup Inc (NYSE:C)’s stock has helped in raising its annual dividend yield, which currently stands at 1.37%. On September 16, Goldman Sachs Group Inc.’s analyst Richard Ramsden released a note in which he downgraded the stock to ‘Neutral’ from ‘Buy’  and also lowered his price target on it to $50 from $52. In his note, Mr. Ramsden mentioned that the earnings inflection point he had expected from the company has failed to materialize and the Citigroup Inc’s current  ROE at 7.62% is well below management’s target of 10%. According to Mr. Ramsden, Citigroup Inc’s expense discipline and growth in higher return businesses like credit cards and wealth management will not be enough to boost the company’s ROE to double-digits. At the end of June, there were 97 hedge funds covered by us that were long Citigroup Inc with the aggregate value of their holdings in it amounting to $8.50 billion.

#2 Patrick Industries, Inc. (NASDAQ:PATK)

– Shares Owned by Tontine Asset Management (as of June 30): 1.26 Million

– Value of Holding (as of June 30): $76 Million

Patrick Industries, Inc. (NASDAQ:PATK) was the only stock among Tontine Asset Management’s eight largest equity holdings in which the fund reduced its stake during the second quarter, by 4%. Other hedge funds that lowered their stake in the company during that period included Richard Driehaus‘ Driehaus Capital and Brandon Osten‘s Venator Capital Management. Patrick Industries, Inc. (NASDAQ:PATK) has been the best performing stock in North America in the last seven years since Todd Cleveland became the CEO of the company on February 1, 2009. In the period since then, the stock has appreciated by over 16,000% and is currently trading up 38% for 2016. For its most recent quarter, the company reported EPS of $1.10 on revenue of $315.20 million versus analysts’ expectation of EPS  of $0.98 on revenue of $292.68 million. During the second quarter, the ownership of the company among funds covered by us increased by four to 19 and the aggregate value of their holdings in it jumped $309 million to $1.31 billion.

#1 IES Holdings Inc (NASDAQ:IESC)

– Shares Owned by Tontine Asset Management (as of June 30): 13.36 Million

– Value of Holding (as of June 30): $165.96 Million

IES Holdings Inc (NASDAQ:IESC) made its debut in Tontine Asset Management’s equity portfolio during the second quarter and was the largest holding of the fund, in terms of value, at the end of that period. IES Holdings is a  holding company that owns and manages subsidiaries that cater to different end markets , which include communications, residential, commercial & industrial, and infrastructure solutions. IES Holdings Inc (NASDAQ:IESC)’s stock recently reached its lifetime high at $18.61 and is currently trading up over 40% for 2016. On August 8, the company reported its fiscal 2016 third quarter numbers, declaring EPS of $0.34 on revenue of $176.94 million for the period, compared to EPS of $0.19 on revenue of $144.1 million it had reported for the same quarter last year. Though the ownership of IES Holdings Inc (NASDAQ:IESC) among funds covered by us remained unchanged at five during the second quarter, the aggregate value of their holdings in it during that time fell by $34.6 million to $187.77 million.

Disclosure: None