Senvest Capital Inc. (OTC:SVCTF) is a holding company that is comprised mostly of assets in two hedge funds controlled by the company.
I have previously assessed the bullish case for Senvest in my first article on Senvest, and the stock price has greatly appreciated in the months after, just to give up all those gains subsequently because of the recent market volatility in which the company saw many of its holdings get hammered. The stock was up 6.57% in 2015, and is down 21.02% YTD in 2016. From its 2015 high, the stock is down around 39%. You might stop here concluding it is too risky and not worth your time, however I would tend to disagree and here's why.
First off, it is not the only one in this situation, many hedge funds have been hit by the recent market weakness. One example is famous investor David Einhorn's Greenlight Capital Re (NASDAQ:GLRE), which had lackluster performance in 2015, being down around 17 percent. Also, Bill Ackman's Pershing Square is already down 17.3% in 2016 on top of his 20.5% loss in 2015. Needless to say that the current market environment is very challenging, even for some of the world's best investors.
A closer look at 2015 results
The Senvest Master Fund LP was down by 17.34% in 2015, while the Senvest Israel Partners LP was up 6.67% though its contribution to the company as a whole is much less. In 2015, the company's book value didn't budge much, despite very bad results and a $35 net loss per share, and that was due to the important rise to the US dollar, which offset the loss since most of the company's assets are denominated in US dollar.
Performance of the March quarter
Based on the company's website where it published the results of the two major funds, the Senvest Master Fund LP was down in January and February (-11.75% return for the first two months). The Senvest Israel Partners LP also faced a contraction of -8.63% year-to-date. We still don't have the performance of the Senvest Cyprus recovery fund but it is probably also going to be negative.
Current discount to book value
If we try to estimate book value at the end of February, given the drop in the two funds and a minor contraction in the US dollar, we can conservatively conclude that it is at least $234, here are the details of the calculation:
BV end of December 2015 = $275
Loss related to investments = approx. 12%
Loss related to US dollar = approx. 3%
Total loss = 15% = $41
Est. BV end of February = $234
Book value is now 191% of current stock price, which is a much higher discount than the average historic discount on the stock (which is irrational in my opinion).
You have to look back at the company's historical results to know that the company has a huge opportunity to bounce back very shortly. I had mentioned in one of my first articles that Senvest benefits from market volatility. Let's see how this 2015-2016 drought compares to previous setbacks for the company.
|BV per share||increase per share||% increase|
|2001||21.10 $||(0.06) $||-0.28%|
|2002||16.66 $||(4.44) $||-21.04%|
|2003||18.91 $||2.25 $||13.51%|
|2004||23.16 $||4.25 $||22.47%|
|2005||50.41 $||27.25 $||117.66%|
This was one of the toughest periods that the company had faced and for the market in general as well. Those years were difficult for most investors as it was very hard to find companies that could provide decent returns. The dot-com bubble had made most stocks very expensive. Therefore, 1999-2000 was one of the worst periods in history to start buying stocks. Results from the company show losses in 2001 and 2002, which management characterized back then as the company's most challenging years in its history. However, the company was able to nicely bounce back in the period from 2003 to 2005 by picking quality stocks. 2003 marked the year of the turnaround, 2004 brought record results, and 2005 followed that. Note that 2005's numbers are a bit distorted because of the accounting change that happened that year, when the company started reporting its holdings at fair value instead of at cost. So, a part of that huge gain of 2005 happened in 2003 and 2004. In all cases, the important thing is to look at all 3 years together, which brought in a 203% increase in the company's book value per share.
|BV per share||increase per share||% increase|
|2007||61.61 $||4.06 $||7.05%|
|2008||37.01 $||(24.60) $||-39.93%|
|2009||87.98 $||50.97 $||137.72%|
|2010||120.01 $||32.03 $||36.41%|
This table is self-explanatory. What I like is that even though the company suffered a similar loss to the market or worse, the rebound trounced the market with a whopping 137.72% in book value in 2009. This was a once in a century moment, and what should take from this is that the company was able to recognize the opportunity and act in a big way to triple book value from 2008's year-end value. Back then, the company was able to sell losing positions and buy even cheaper ones, it basically loaded up on cheap financial stocks that were beaten down. This looks obvious looking back, but very hard to execute in the moment. To have managers that can act in that manner in moments of turmoil is a good sign for shareholders.
|BV per share||increase per share||% increase|
|2011||93.44 $||(26.57) $||-22.14%|
|2012||117.51 $||24.07 $||25.76%|
|2013||201.69 $||84.18 $||71.64%|
|2014||264.00 $||62.31 $||30.89%|
This period is different than the others and one of the best (and easiest) time for investors to have been invested in stocks, as the bear market of 2011 was quickly followed by 3 years of big market gains and general P/E expansion. Senvest, again was able to profit in a big way, especially its tremendous 2013 performance, which was one of the best amongst hedge funds.
Current slump (2015-...)
While book value actually increased in 2015 by 4.39%, it was largely (and only) due to the decline of the Canadian dollar versus the US. Why I call it a slump is because the company did suffer investment losses in 2015 (Loss per share of $35.39). Also, the Canadian dollar rebounded a bit this year, and Senvest's investments continue to suffer, so the first quarter will look very bad. Senvest is at its most challenging times since the great recession of 2008-09.
However, if you look at past performance as an indicator, it should make you very bullish for the next few years. There is no reason to think, given management's wealth of experience and knowledge, and proven results, that we wouldn't get the same kind of results we had in the past, especially when management is so optimistic about the company's core positions.
Interesting investment ideas
What I love about Senvest is that I get to invest my money with some of the greatest capital allocators in the business, get a sense of their thinking, as well as uncover new investment opportunities.
I will present two of them here that I feel I got an understanding of and that fit my circle of competence. I think these are also great picks in the current market:
This one is the most interesting one for me, especially given recent developments in which the company is suing Apple (NASDAQ:AAPL) for trampling over some intellectual property revolving haptics technology. Since Apple announced the Apple Watch, which involved haptic feedback (or taptics as they call it), this market has been expanding and who better than the leading tech company to validate the technology. We saw Apple going further by incorporating it in its most recent Macbook model and iPhone 6s as well. Immersion is known for its big wins in court against technology giants, and if they can win this one, it can be very positive news for shareholders.
The company's stock price had declined significantly and is now just starting to get a lift after the announcement of Q4 results, but it could still have a decent runway especially if its Samsung contract is renewed and/or if there is a positive outcome in the lawsuit against Apple.
If you have a chance, listen to this conference call to get a clear picture, and where you would also hear M. Mashaal's thoughts on the company's prospects and its fair value (at multiple times current price).
I have heard M. Mashaal's thoughts on this company many times in the past and have outlined his thinking in my previous article. Since then, there has been positive development for the company with Pepsi announcing the incorporation of Sweetmyx in two of its products in selected markets (Manzanita Sol and Mug Root Beer). Though it still is an experimental deployment at this point, for a company like Pepsi to do this, even in a small market, is significant and shows that the product innovation is real. What's more is that the stock price hit yearly lows and is trading at a very reasonable price. I should say this one is a bit more risky than Senvest's usual investments. However, the potential rewards here are huge. This stock could also be a multi-bagger from current levels, if the firm can get the market acceptance by Pepsi for only one of its major products.
I believe Senvest offers an amazing risk/reward opportunity here and is a way to benefit from a potential bull market. The current price makes it one of the best times to buy in many years, given the increasing discount to book value and its core holdings becoming cheaper, therefore offering upside potential on both fronts. Needless to say that I will continue adding to my position at these levels.
Disclosure: I am/we are long SVCTF.
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.
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