Kingstown Capital is a New York-based, value oriented hedge fund. It reported -0.7 percent return in the second quarter, and 10.6 percent year to date. The firm has yielded average annual returns of 13.9 percent since its inception. Kingstown Capital has invested 63 percent of its money in US and international equities, 15 percent in credit, and another 8 percent in hedges.
The firm says that the US share market has been negative on global economic recovery and European debt crisis. However, market did recover a bit when the conservative party won the Greek elections in June, and reaffirmed that Greece will remain with EU. Since the firm has over 50 percent equity exposure, even the small sell offs can affect the earnings. It will also benefit heavily from the raging bull market.
Kingstown Capital prefers stocks over bonds, so it has added many dividend yielding stocks in its portfolio. Dividend stocks have proved to be a safer bet in an otherwise unpredictable market. Kingstown Capital has constantly been tracking the conditions in the Eurozone that could affect its returns. The investment firm has placed about 20 percent of its money in Europe, but most of it is outside of Eurozone. The only investment of Kingstown Capital in the EU, is a Greek corporate credit.
During the second quarter, Kingstown Capital made some exciting new investments, and exited the ones it was losing money with. Here is the detailed overview:
In second quarter, the investment in QLT Inc. (NASDAQ:QLTI) did very well. Some new directors joined the board of QLT Inc. during the company’s annual meeting in June. Kingstown Capital remains optimistic about QLT Inc. as majority of its market value comprises of cash and other financial assets.
Another investment, the commercial insurer, Old Republic International Corporation (NYSE:ORI), is trading at 60 percent below its book value. In the first quarter this year, the insurer had planned to turn around its troubled mortgage insurance business, but it had to withdraw the plans due to regulatory complaints. After the withdrawal, Old Republic’s stocks fell 20 percent within two days. But the company has been yielding healthy dividends for the past 25 years. Last year, Old Republic gave a dividend of 8.5 percent.
Kingstown is also building a position in Barnes & Noble, Inc. (NYSE:BKS), which attracted $300 million of investments from Microsoft Corporation (NASDAQ:MSFT) in the beginning of the second quarter. Kingstown Capital believes that if Barnes & Noble, Inc. (NYSE:BKS) splits the digital business from core retail division, the bookstore chain will give better returns to shareholders.
In the April-June quarter, Kingstown Capital exited from DirectBuy and Statoil ASA (NYSE:STO). DirectBuy is a retailer of home furnishings and appliances. In 2011, it had hired a restructuring adviser when the cash flow was declining, and the interest burden continued to mount. Kingstown Capital also got an opportunity, along with other advisers and bondholders, to engage with the company management. As the investment firm gained insights into the retailer, it realized that DirectBuy’s management was unable and unwilling to operate effectively. Kingstown Capital lost about 30 percent in DirectBuy before exiting it.
Statoil ASA Fuel and Retail owns a chain of gas stations / convenience stores across central and eastern Europe (CEE). It was spun off from Statoil oil company in 2010, and gave good returns in the beginning, but soon its expansion plans into real estate failed, and CEE business couldn’t demonstrate satisfactory growth.
Kingstown Capital made two important investments during second quarter. Comverse Technology, Inc. (NASDAQ:CMVT) is a New York-based software and telecom company, which has two divisions. The first division, CNS, provides software products and services to the telecommunications industry. The second unit, Verint Systems Inc. (NASDAQ:VRNT) is a business intelligence software developer. Kingstown Capital estimates that Comverse Technology is currently trading at about 60 percent of its actual value.
The other new investment was in Regis Corporation (NYSE:RGS), which runs over 9,000 hair salons across the US, under various brand names such as Regis, Mastercuts and Supercuts. It was badly affected during the 2008 economic crisis, and its profits were eroding until late 2011, when an activist fund replaced Regis’ non-performing management team. Now the company is focusing only on its core business.