Madison Street Partners Is The Little Fund That Could

by: Activist Stocks

Insider Monkey tracks over 400 hedge funds and calculates the value-weighted returns for these funds quarterly, limiting the data to long-positions and the 1500 largest stocks. For the last two quarters of data -- the second and third quarters of 2012 -- one of the smaller funds in the industry is in the top 50 for both quarters, which is very good. The fund is Madison Street Partners (read more about Madison Partners here).

The hedge fund founded by Steven Owsley in 2004 focuses on small and mid-cap stocks, taking long/short positions. The fund is relatively small, at just over $100 million, compared to the likes of David Einhorn and Greenlight Capital's $6 billion fund. Based on just Madison's long positions, according to their 13F filings, the hedge fund finished in the top 50 by running a concentrated portfolio. At the end of the third quarter, Madison had over 50% of its portfolio invested in its top five stocks. Starz (STRZA) and Liberty Global (LBTYK) were Madison's top two holdings, with 16% and 9.8% of its portfolio invested in the companies, respectively. Madison's other major investments included Pain Therapeutics (PTIE), Apple (AAPL) and MasterCard Inc (MA); these three stocks made up 25.5% of Madison's portfolio (check out the top performing hedge funds).

The 2012 returns for Madison's top five picks shape up as follows:

2012 Returns



Liberty Global


Pain Therapeutics






Starz. This spin-off has garnered much attention of late after its spin-off from Liberty Media. Although Liberty Media will retain the stake in Sirius, the smaller Starz-unit still has solid earnings-generating capabilities. The business has managed to grow revenue and subscriber growth by almost 5% annually for the last 5 years. Starz is now competing with the likes of CBS and Disney (which are trading at around 18 times earnings) as a standalone company. Even on a forward basis, Starz only trades at 9 times earnings. Starz failed to renew its deal with Netflix, which has been the top talk, but concerns could be overblown, given its less than gigantic contribution to Starz's bottom-line. Even so, Wall Street expects earnings over the next five years to remain flat, unpromising prospects if I do say so myself. There is one big bright spot for the stock: There has been some speculation that Starz is in the cross-hires of the larger media companies, making it a takeover target. Trading at a market value that is less than $2 billion certainly makes this takeover a possibility, with suitors including Viacom ($29 billion market value), Time Warner ($47 billion market value) or CBS ($26 billion market value). This stock is worth keeping in eye on, but due diligence is required.

Liberty Global is a diversified media and telecom company generating revenue from video, broadband and telephone. One key note worth mentioning is that Liberty operates in a number of countries, but not the U.S. A couple of key growth markets include Europe and Latin America. The company is also growing its customer base rather robustly, where the customer base was up 35% for its triple-product (TV, internet, telephone) offering year over year last quarter. The Board has also authorized a $1 billion share buyback plan, with the company already gobbling up some $9 billion in shares over the last seven years. The European exposure has frightened some investors, but the market has proved to be robust for Liberty's products, despite a global economic slow down. Not only is Liberty growing its subscriber base at an impressive rate, with 8.8 million digital TV subscribers at the end of the third quarter 2012, but the company is now focusing on digging deeper into customer wallets by offering more products, including DVRs, high-def TV service, and video on demand; all of these services will boost the average revenue per user. These initiatives coupled together should help drive Wall Street's estimated long-term EPS growth rate of 28%, which puts the stock's PEG at 0.95 -- a pretty good 'growth at a reasonable price opportunity' if you ask me.

The only down stock for 2012 of the five was Pain Therapeutics, which is a biopharmaceutical company that develops novel drugs. These small-cap biopharma companies are either big winners or losers, and Pain appears to be on the wrong-end -- having lost over 75% since it started trading in Feb. 2008. The company does have four drug candidates in clinical programs, including Remoxy, Oxytrex, PTI-202 and a radio-labeled monoclonal antibody. Although we would remain cautious on this micro-cap stock, trading with a market value of $120 million, Wall Street appears to be encouraged by the company's prospects: The 5-year expected earnings growth rate is 50% annually. Again, without getting too excited, in looking at the 2012 expected EPS of -$0.03, a 50% annual growth shouldn't be too hard, right?

As you probably known by now, Apple has taken a beating year to date, down 17%, after posting quarterly results that showed the first contraction in growth since 2009, fourteen quarters to be exact. For last quarter, Apple's first quarter of fiscal year 2013, the tech gian tposted EPS results of $13.81 compared to $13.87 for the same period last year. The selloff pressure comes as a result of rising costs of product overhauls thanks to increased competition from Samsung Electronics Co. Wall Street analysts have revised long-term earnings growth estimates, lowering the expected compounded annual growth rate from 20% to 14%. Following the earnings call, analysts also revised fiscal year 2014 (ending Sep.) EPS downward by 10% and 2013 down by 7.2%. The Wall Street Journal also reported that Apple cut its orders for iPhone 5 screens in half for Jan. - Mar. This is signaling the fundamental problem that many fleeing investors were worried about: Apple running into issues with being able to innovate in such a fashion that earnings growth would continue to the right trajectory. The fundamental concerns are product demand decline and margin compression. The positives for the recent stock pullback include the fact that Apple has seen its dividend yield increased to 2.3%, and another result is an industry low price to earnings multiple of 10. Apple is still one of the top ten tech stocks loved by hedge funds (see all 10 here).

MasterCard. The payment processing company has been growing nicely on the back of a transition to online payments. MasterCard has also partnered with ING to provide mobile payments, starting in the Netherlands. Overall, gross dollar volume is projected to increase by 12% in 2013, and the long-run bet will be the growing transition from cash to cards. With no debt and strong free cash flow generating abilities, bringing in over $2.7 billion in cash flow from operations for the first nine months of 2012, the financial services company is well-positioned to make strategic acquisitions. MasterCard's dividend is minimal, but the company has been active in returning capital to shareholders via buybacks, initiating a $1.5 billion program in Jun. 2012 after completing its previous plan of $2 billion implemented in 2010. Operating margins have also been in steady improvement, moving form 39% in 2008 to 54.6% for the first nine months of 2012.

Stacking up MasterCard against its top peer Visa, and it appears that MasterCard is the better buy:

Price to Earnings

Price to Sales







Here are how Madison's top five (third quarter 2012) picks are stacking up so far this year:

2013 YTD (Jan. 25) Returns

Starz *


Liberty Global


Pain Therapeutics






* n/a due to spinoff in early Jan.

Although Madison did show its dominance in the last couple quarters, this could well continue as speculation of a Starz takeover heats up and Liberty Global extends its stronghold on the European media market. There's also Pain Therapeutics, which operates in the speculative biopharma market. The more well- known plays by Madison include large-cap stocks Apple and MasterCard. Apple appears to be a value play, while MasterCard a growth, with an 18% expected 5-year earnings growth. Use your own judgment when assessing whether Apple's products are in trouble, and remember there are inherent flaws with investing in stocks simply for the acquisition potential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.