Was Ahmet Okumus’ Right About His Top Bets?

New York-based long/short equity hedge fund Okumus Fund Management and its founder Ahmet Okumus are well-known in the value investing space. Mr. Ahmet started investing in the US stocks in 1992 with 15,000 borrowed from his mother and turned that investment into over $6 million by early 2000 by investing in undervalued stocks. He launched his first hedge fund, Okumus Opportunity Fund, in 1997 and has consistently generated impressive returns over the years. Mr. Okumus runs a fairly concentrated portfolio and makes big bets on the stocks he likes. According to Okumus Fund Management’s last submitted 13F filing its US equity portfolio at the end of September was worth $764 .22 million, up by 158.8% on the quarter. The filing also revealed that Okumus’ top 10 equity holdings amassed 96.26% of the value of its equity portfolio. Since Mr. Okumus makes large bets on the stocks he deems undervalued, in this article we will be analyzing the performance of the fund’s top five stock picks during the final quarter of 2015 and the beginning of 2016.

At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here).

#5 Ascent Capital Group Inc (NASDAQ:ASCMA)

– Shares Owned by Okumus Fund Management (as of September 30): 1.29 million

– Value of Holding (as of September 30): $35.3 million

During the second quarter of 2015, Okumus hiked its stake in Ascent Capital Group Inc (NASDAQ:ASCMA) by 449%  and during the third quarter, amid a 36% decline registered by the stock, Okumus increased its stake by another 50%. However, shares of Ascent Capital Group Inc (NASDAQ:ASCMA) continued their decline during the fourth quarter and lost another 39% on the back of weak financial results reported by the company. Overall, since the end of September, Ascent Capital Group’s stock has lost more than 50%.

Ascena Capital Group has not reported its financial results for its last quarter yet, but analysts project a net loss of $0.01 per share on revenue of $1.88 billion. Moreover, earlier this month, Goldman Sachs upgraded the stock to ‘Neutral’ from ‘Sell’ but maintained the price target at $7.00. Following the decline registered by the stock, it is trading at around 7.6 times forward earnings, which significantly below the S&P 500 average. One of the investors bullish on the stock is billionaire Jim Simons‘ Renaissance Technologies, which boosted its stake in Ascena Capital Group almost threefold to 553,940 shares during the fourth quarter of 2015.

#4 Lifelock Inc (NYSE:LOCK)

– Shares Owned by Okumus Fund Management (as of September 30): 8.84 million

– Value of Holding (as of September 30): $77.44 million

Shares of identity-theft protection provider Lifelock Inc (NYSE:LOCK) fell from a cliff during the third quarter after the U.S. Federal Trade Commission(FTC) announced allegations against the company that it was making ‘deceptive claims’ regarding safeguarding customers’ data. Nevertheless, Okumus Fund Management had made a wise decision to boost its position by 162% during that period and Lifelock Inc (NYSE:LOCK)’s stock surged by 64% during the fourth quarter after the company reached a tentative agreement with the FTC. According to the terms of the agreement Lifelock Inc won’t admit to any wrongdoings, but it will be paying $100 million – the largest monetary award obtained by the FTC in an order enforcement action – to settle the charges against it. In his third-quarter letter to investors, Ahmet Okumus said:

“After deep research into the FTC case, we believe there is a high likelihood that the outcome is significantly better than what the stock is pricing in. Trading at less than 5 times EV/FCF, LifeLock’s business is still performing very well despite the negative publicity. Lifelock has navigated challenges to their business before and we have confidence they will do it again.”

#3 HP Inc (NYSE:HPQ)

– Shares Owned by Okumus Fund Management (as of September 30): 4.48 million

– Value of Holding (as of September 30): $114.9 million

Okumus Fund Management initiated a large stake in HP Inc (NYSE:HPQ) during the third quarter, several weeks ahead of the completion of the company’s spin-off of its enterprise business. After the spin-off was completed on November 1, shares of both HP Inc (NYSE:HPQ) and Hewlett Packard Enterprise Co (NYSE:HPE) largely remained range-bound during the fourth quarter. HP Inc (NYSE:HPQ) has started 2016 on a dismal note, losing 24% year-to-date.

“The Fund also initiated a number of new positions during the quarter. One such position was Hewlett Packard (HPQ), which had traded down over 30% this year on concerns about PC demand, the negative impact of FX (the strong dollar hurting the value of overseas revenues), and the company’s reduced cash flow guidance. We felt that those concerns were more than priced into the stock at a valuation of 7 times normalized free cash flow. The PC business has certainly been weak in 2015, but it contributes less than 10% of total EBIT. Earnings are declining slightly year-over-year due to the impact of FX, but on an organic constant-currency basis, which we feel is more reflective of a company’s true growth rate, HPQ will grow in the mid-single digits in 2015. There have also been a number of one-time items from separation costs and restructuring that will depress free cash flow this year and next, but these are temporary. At $25 per share, the company is trading at a P/E of 7 times and a price to EBITDA of 4 times, one of the lowest valuations in the S&P 500, even though the company has stabilized revenues and earnings on a constant-currency basis,” Okumus said in his letter to investors for the third quarter.

#2 Web.com Group Inc (NASDAQ:WEB)

– Shares Owned by Okumus Fund Management (as of September 30): 7.23 million

– Value of Holding (as of September 30): $152.52 million

Web.com Group Inc (NASDAQ:WEB) is the only stock in this list in which Okumus Fund Management reduced its stake (by 8%) during the third quarter. Since the end of September, the stock is down by some 21% amid a broader market sell-off and following a data breach reported by the company in August. However, the company said that the data breach affected only 3% of its customer base and resulted in a revenue loss of less than 1%. Following the decline, the stock is currently trading at a forward P/E multiple of 5.5, which makes it very cheap. For the last quarter of 2015, Web.com posted EPS of $0.66, which was better than the $0.63 reported by analysts. Renaissance Technologies is also bullish on Web.com, and reported 438,000 shares in its 13F filing for the fourth quarter.

#1 EMC Corporation (NYSE:EMC)

– Shares Owned by Okumus Fund Management (as of September 30): 7.18 million

– Value of Holding (as of September 30): $173.65 million

Okumus Fund Management initiated a large stake in EMC Corporation (NYSE:EMC) during the third quarter, making the stock its largest equity holding at the end of September. It seems to have been the right call as later in October Dell Inc. announced that it would acquire EMC for $67 billion, which propelled the stock higher. In January, EMC Corporation (NYSE:EMC) announced that it will lay off a large number of its employees in 2016 to bring its operating costs down. Though there are still some concerns about whether the deal will go through or not, most analysts expect the Dell-EMC merger to get completed by the end of the third quarter of 2016.

Disclosure: None