By now all institutional investment professionals and large hedge funds have filed their quarterly 13F reports, revealing their latest purchases and sales in the 2012 fourth quarter. After looking over several dozen of these filings, some interesting names showed up that may be worth a closer look.
Fairholme Capital, the multi-billion value fund run by Bruce Berkowitz, posted an interesting filing about company micro-cap home improvement retailer Orchard Supply Hardware (OSH), a $38 million dollar company at today's market price. The initial intrigue focused on why a multi-billion fund is investing in a microcap. I quickly found out that OSH was spun out of Sears Holding (SHLD), of which Fairholme is a big shareholder. But Orchard is a spinoff and guys like Berkowitz have no interest in owning a microcap. So the natural move is to monetize the asset and sell -- and that's clearly what is happening to Orchard. Less than a year ago, the shares were trading for $27; today the stock trades below $6.
Unfortunately, Orchard has an ugly balance sheet: more than $300 million in total debt and negative equity. The company is working with creditors to right the ship. The other problem is that OSH competes in the same space as Home Depot (HD) and Lowe's (LOW). The situation is bad at OSH at the moment, but the company continues to move along opening new stores. I guess if there were ever a time for a company to have a debt problem, today's low interest rate world is it. The company is cash flow positive and two years ago net income was $20 million. I wouldn't touch the stock until a deeper look but this is an asymmetric payoff: if OSH rights the ship, you are probably looking at a gain of two to four times your investment.
Technology company QAD Software (QADA) is a name that shows up as a holding for Roumell Asset Management, a top notch value fund based out of Maryland. What I like about QAD is that it's software serves the manufacturing industry, an industry that seems to be experiencing a renaissance again here in the US. In addition, QAD has rock solid financials: net cash of over $4 per share against a stock price of $13, a fantastic unlevered return on equity, and strong operating cash flows with little capital expenditures.
Idenix Pharmaceuticals (IDIX) is another small-cap name that showed up as a new holding at Baupost, Seth Klarman's legendary investment firm. Shares of Idenix trade for $4.66, down from $13. The market cap of $630 million includes over $250 million of cash and no debt. Idenix engages in the discovery and development of drugs for the treatment of human viral diseases with a focus on treatments for Hepatitis C as well as HIV and Hepatitis B. The stock price decline was due to a pipeline setback but Idenix managed to raise nearly $130 million in cash from a stock issuance at prices significantly higher than today's price. Biotech companies such as Idenix have huge payoffs when milestones are met and Baupost has a rather successful track record of investing in such names.
Whether or not these names pose any intriguing opportunities will require a much closer look. However, since Mr. Market usually disregards them, complex investment situations can yield the biggest payoffs.