H. Kevin Byun’s Denali Investors returned +4% in the first quarter of this year, according to a letter to investors seen by ValueWalk. We have talked about the outsized returns of this hedge fund before – Denali was up 66% in 2013 with winning investments in several of its long holdings.
Denali invests in Dover and Knowles spinoff
Denali positioned itself to benefit from the Dover Corp (NYSE:DOV) and Knowles Corp (NYSE:KN) spinoff. The letter discussed the investment in detail, and the fund grabbed the opportunity to buy Dover Corp when shares fell sharply in Q1 after a missed earnings report. The fund exited the position as it hit the target price and used that space to invest in the new entity, Knowles Corp. Knowles develops acoustic technology for commercial purposes and for hearing aids and precision devices. Denali believes that the market is underpricing Knowles’s stock which currently trades around $15. The letter goes on to explain that Knowles has significant potential to grow, since it is the major supplier of handset manufacturers like Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (KRX:005930).
Value of pure-play business
The fund also initiated investments in Rayonier Inc. (NYSE:RYN), a company that deals in forest products. Rayonier spun off its performance fibers business into a new company called Rayonier Advanced Materials. Byun thinks that the new Rayonier can function more freely as a timber REIT, and its business can now easily be compared against other pure play timber REITS. The letter further said,
“New RYN will no longer have the performance fibers business as an overhang to traditional REIT investors. New RYN will offer an attractive dividend that is expected to grow. Its low pro forma leverage profile is a fraction of comparables and provides capacity for growth and other potential transactions.
Its low leverage also would be attractive for potential acquirers.”
Similarly Rayonier Advanced Materials will emerge as a pure-play cellulose specialties chemicals company, which will allow it to define its own niche.
Denali exited positions in Mosaic Co (NYSE:MOS), LIN MEDIA LLC (NYSE:LIN), Harvest Natural Resources, Inc. (NYSE:HNR), and Office Depot Inc (NYSE:ODP). Almost all of these companies experienced a decline in their share price over the course of last quarter.
The quarterly letter also discussed select portfolio positions including Sunedison Inc (NYSE:SUNE), which makes components for photovoltaic cells, Extendicare Inc (TSE:EXE.UN), a post-acute care services company and Genworth Financial Inc (NYSE:GNW). Denali once again talked about John Malone’s empire and the value in Liberty’s entities. You can read the full letter below.