Hedge Funds' Latest Moves: Diamondback Energy, Walker & Dunlop, Town Sports International Holdings

Includes: CLUB, FANG, HMTV, WD
by: Insider Monkey


Farallon owns 4.06 million shares of Town Sports while HG Vora holds a 3.88 million share stake.

Wexford Capital reduced its FANG position down to 928,000 shares.

Fortress Investment Group dumped its entire Walker & Dunlop stake.

By Tim Frederick

We have a jam-packed update with the latest series of filings concerning some of the top stock picks among the hedge funds we track. Notably, two funds both filed on the same company, Town Sports International Holdings, Inc. (NASDAQ:CLUB), with Farallon Capital (founded by billionaire Thomas Steyer) and Parag Vora's HG Vora Capital Management both filing to disclose the separate agreements they reached with the fitness club operator.

We'll start there, given the compelling story of two activist investors being intimately involved in guiding a small-cap company. We pay special attention to hedge funds' small-cap picks because our research has shown that the top small-cap stock picks of hedge funds outperformed the market by double digits annually in our back tests. We have also been forward-testing the performance of these stock picks in real-time since the end of August 2012. These stocks outperformed the market by a cumulative 79.4 percentage points over the last 30 months (see the details). We also know the value of tracking the moves of activist investors, who often bring a fresh outlook and an eye on increasing shareholder value to their dealings with the companies they invest in. This is why we actively track and report on what activists are up to, and what it might mean for investors.

In the case of the New York-based Town Sports International Holdings, Inc., the company is coming off a calamitous year for investors, with shares plunging nearly 60% in 2014. Early in January, Vora and PW Partners Atlas Fund nominated six independent directors for the company's board after it adopted a "poison pill" to prevent a potential hostile takeover by the funds. The news of a potential proxy fight sent shares of Town Sports up nearly 15% the next trading day.

A proxy fight has been averted however, as Town Sports has reached an agreement with both Vora and Farallon to have three of the original six nominees, and five new nominees in total added to its board of directors effective immediately, while four previous directors have been removed. In accordance with the agreements, both funds have committed to voting their shares for the full slate of director nominees at the 2015 annual shareholder meeting.

Farallon owns 4.06 million shares of Town Sports, a 16.7% stake, while Vora holds a 3.88 million share, 15.9% stake, making them by far the two largest shareholders among funds we track. Billionaire Jim Simons' Renaissance Technologies also held an 860,800 share stake at the end of 2014.

Let's move on to the other two filings, beginning with Charles Davidson's Wexford Capital, which continues to systematically sell off its activist stake in Diamondback Energy Inc (NASDAQ:FANG). The fund's latest Form 4 filing with the Securities and Exchange Commission shows that they disposed of just under 242,700 shares at an average price of $71.93, bringing its remaining ownership down to 928,000 shares.

The sale was the latest in a long-running series of sales dating back to early 2013 that have seen the fund's once-massive stake of 16.41 million shares reduced to less than a million. The sales have also drastically reworked Wexford's portfolio, with the position that has at times constituted more than 50% of the value of its equity portfolio now being vastly reduced, and it will be interesting to see where Wexford reallocates that capital. Earlier this year, it revealed a new position in Hemisphere Media Group, Inc. (NASDAQ:HMTV), and opened positions on several energy companies in the fourth quarter.

Diamondback has proven to be an exceptional investment for Wexford, gaining over 135% since the middle of 2015, and in fact even being higher at times during 2014, when Wexford was also selling shares. Billionaire Israel Englander of Millennium Management would be the largest shareholder of Diamondback now based on end of 2014 figures, as he owned 2.17 million shares at that time.

Lastly, we have Michael Novogratz' Fortress Investment Group, which has done Wexford one better by selling its entire 8.25 million share stake in Walker & Dunlop, Inc. (NYSE:WD), as a secondary share offering for that company, which it will not receive any proceeds from. Fortress has been a major shareholder of the commercial real estate finance company since late 2012, and owned 10.55 million shares from the first half of 2013 until the fourth quarter of last year. During that time, fund ownership in Walker & Dunlop has increased around it, as shares have remained mostly flat over the past 21 months.

Chuck Royce's Royce & Associates was the second largest shareholder among funds we track with ownership of just under 700,300 shares at the end of 2014, while several other funds opened new positions during the fourth quarter.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.