Whitebox Advisors’ Top Long Positions Heading Into Q2

Andy Redleaf‘s Whitebox Advisors was in the news earlier this year when it announced the closure of its mutual fund operations after seeing significant redemptions by investors in 2015. While shutting down one of its important business units would surely have been painful for the firm, its recently submitted 13F filing shows that the closure hasn’t hampered the firm’s activity in its mainstay hedge fund business. According to the filing, Whitebox Advisors’ U.S equity portfolio experienced a quarterly turnover of 73.62% during the first quarter and was worth $3.42 billion at the end of that period, which amounts to roughly 90% of the $3.85 billion that the fund had in assets under management at the beginning of 2016. The filing also revealed that though the fund’s equity portfolio was well diversified, consisting of 86 positions, its top-10 holdings accounted for 73.62% of the value of its portfolio at the end of March. Taking into account the fund’s renewed focus on its hedge fund business, we’ll go through Whitebox Advisors’ top five stock picks as of the end of the first quarter in this article and try to glean what makes the fund bullish on them.

We track prominent investors and hedge funds 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 among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 EMC Corporation (NYSE:EMC)

 – Shares held by Whitebox Advisors (as of March 31): 1.53 million

 – Value of Holding (as of March 31): $40.72 million

While Whitebox Advisors kept its stake in EMC Corporation (NYSE:EMC) unchanged during the first quarter, several hedge funds made significant changes to their stakes in the company during that period, including Jonathan Lourie and Stuart Fiertz’s Cheyne Capital, which lifted its holding by 38% to 1.32 million shares. EMC Corporation (NYSE:EMC)’s stock has been trading in a range for the last two months as the company awaits the completion of its merger with Dell Inc. and currently boasts year-to-date gains of nearly 2%. Though the company reported worse than expected numbers for the first quarter, its stock spiked on the day of its earnings release due to a 13.65% rally in the stock of VMware, Inc. (NYSE:VMW), which reported stellar earnings a day earlier and in which EMC Corporation owns an 80% stake. In regards to its own first quarter earnings, EMC Corporation reported EPS of $0.31 on revenue of $5.5 billion for the quarter, lower than the EPS of $0.33 on revenue of $5.64 billion that analysts had expected. On May 2, Dell Inc. and EMC Corporation jointly announced that following the completion of their merger, their combined family of businesses will be called ‘Dell Technologies’.

#4 American Capital Ltd. (NASDAQ:ACAS)

 – Shares held by Whitebox Advisors (as of March 31): 3.87 million

 – Value of Holding (as of March 31): $59 million

Shares of American Capital Ltd. (NASDAQ:ACAS) have been on a perpetual rise since mid-February, which could be a reason why Whitebox Advisors reduced its stake in the company by 20% during the first quarter. Under pressure from billionaire activist investor Paul Singer‘s Elliott Management last year, the company roped in two investment banks to review its “strategic alternatives”. After the completion of the strategic review at the beginning of this year, the Board of American Capital Ltd. (NASDAQ:ACAS) announced that it will start looking for buyout offers. Shares of the country’s third-largest business development company (BDC) are currently trading at their lifetime high of $15.98. However, that is still an almost 20% discount to the NAV of $19.88 that the company reported during its fourth quarter earnings release. Though most analysts that track American Capital Ltd. believe that its stock might never be able to trade at a premium to its NAV like the stocks of other BDCs, they think it can narrow the gap in the next few months, especially after the company finds a buyer. According to a recent 13D filing by Elliott Management, the fund and its associates had collective economic exposure to around 13.2% of American Capital Ltd.’s shares as of March 31.

We’ll detail Whitebox Advisors’ top three stock picks as of March 31 on the next page.