By Bryan Rich
August 17, 2016, 3:45pm EST
We’ve talked about the recent public portfolio disclosures that have made in recent days by the world’s biggest investors.
And as we’ve discussed, the 13F filings only offer value to the extent that there is some skilled analysis applied. Loads of managers file 13Fs every quarter. And the difference in manager talent, strategies, portfolio sizes … run the gamut.
Through our research of over 15 years, among the most predictive factors in these filings is the presence of high conviction positions. To put it simply, the bigger the position relative to the size of their portfolio, the better. Concentrated positions show conviction. Conviction tends to result in a higher probability of success, especially when the investor has a controlling stake and is influencing (or seeking to influence) management. At that stage, these positions will show up first, before the quarterly 13F filing, in more timely filings called a 13D (or 13G) filings.
Here’s a look at a specific case that fits that profile, with some detail on why it matters.
If we look across high conviction positions among the recent 13F filings, among the highest, we find Carmike Cinemas (symbol CKEC). Mittleman Brothers, a $410 million hedge fund and value investment advisor, runs a concentrated portfolio, and owns 9.6% of the CKEC.
The stake represents (as of the most recent 13F filing) more than 31% of its long U.S. equity portfolio (more than 18% of its overall portfolio). That’s a huge stake.
After fees the Mittleman Brothers have returned 17% annualized since inception (2003). So we have a manager that has doubled the S&P 500 over the 14 years, runs a concentrated portfolio, and has an ultra-high conviction stock in CKEC. And in this particular case, they have the ability to influence the outcome in CKEC.
The fund filed a 13D on Carmike back in March, which means they intended to influence management. Mittleman has since been trying to block a sale of Carmike to AMC Entertainment Holdings for a value they deem “unacceptably low.”
At the time of the first takeover offer, the stock traded at just around $25 (so a $30 takeout would be a 20% premium). The stock now trades at $31. But based on industry multiples, Mittleman argues the company should be sold for no less than $40, and as much as $47. The bid has since been raised, but remains at levels Mittleman has deemed unacceptable.
The moral of the story: As we know, management’s mandate in public companies is to maximize shareholder value, but unfortunately it doesn’t always happen (most of the time, only after their interests are maximized). That’s why siding with influential shareholders that are fighting to maximize your return on investment is critical. In the case of Carmike, you have management that is willing to give away the company for as little as 70 cents on the dollar (according to view of one of its biggest shareholders).
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.