As Glenview reports performance near 18 percent year to date, the secret to their success has been investments in healthcare and technology. But the most interesting aspect of the story is what they are doing in the semiconductor industry and a “special situation” investment.
In the quarter the hedge funds long positions were a +19.5 percent positive contribution, while the short portfolio subtracted -7.42 percent from results, based on an investor letter reviewed by ValueWalk.
Glenview’s top winning individual positions
The top winning individual positions included Monsanto Company (NYSE:MON), Flextronics International Ltd. (NASDAQ:FLEX), Humana Inc (NYSE:HUM), Community Health Systems (NYSE:CYH), Tenet Healthcare Corp (NYSE:THC), WellPoint Inc (NYSE:WLP), HCA Holdings Inc (NYSE:HCA) and Walgreen Company (NYSE:WAG). Technology plays that contributed to success were primarily found in the stock of Flextronics and Applied Materials, Inc. (NASDAQ:AMAT). A long credit position in residential mortgage backed securities (RMBS) also contributed to positive returns.
The report, which was published July 15, discussed the “dollar stores segment,” and noted that Dollar General Corp. (NYSE:DG) repurchased 4% of its shares, as Carl Icahn has acquired a 9.9% stake in Family Dollar Stores, Inc. (NYSE:FDO) and is advocating consolidation. Days after the investor letter was published a consolidation took place.
Glenview on excess capital
Going forward Glenview considers what has driven its success is likely to continue to propel returns. The letter cited its “affinity” for “convertible equities” with strong fundamental business values and “optionality to create excess value.” What this means is the company has excess capital to deploy and sees stocks where activist tactics have yet to be deployed.
Fitting this criteria, the letter points to five investments: Carter’s, Inc. (NYSE:CRI), National Oilwell Varco and Cadence Design Systems Inc (NASDAQ:CDNS) and Genia Technologies.
In regards to Carters, Glenview notes that while the children’s apparel segment has underperformed the S&P retail sector, Carters has a shine. The letter notes that, in contrast to peers, CRI has reported two quarterly beats this year and forward earnings expectations are essentially unchanged (1% lower).
It is telling that the competition is having difficulty revising their estimates as previous sales patterns aren’t performing in as robust a fashion. In other words, Carter’s competition is finding it more difficult to adjust to lowered results while Carters holds firm.
Glenview likes National-Oilwell Varco
Glenview likes National-Oilwell Varco, Inc. (NYSE:NOV) because change in corporate management and the stock trading in a value range leads the fund to like this pick. Their pick in Cadence is based on capital deployment opportunities and a product cycle refresh that could better position the firm in the semiconductor industry. Other hedge fund managers have noted consolidation in certain tech sectors that is expected to lead to pricing power and increased segment profits.
Genia Technologies is a private company the hedge fund considers a “special situation” investment. Glenview prefers investments in highly liquid offerings, but Genia is the sleeve of the portfolio that requires a bending of the rules. Noting its previous investments in Life Technologies and Ion Torrent, the early stage development company Genia.
The company is engaged in what might be considered mind blowing technology in the semiconductor space that is disruptive to the point it has “the potential to undermine some of our upside cases in Life/Ion Torrent, and subsequently Thermo,” according to the investment letter.
Glenview’s investment in Genia
Glenview’s investment in Genia might be considered what is known as a “Texas hedge” except it protects the fund’s downside to an unusual degree. A “Texas-hedge” is a term used by professional traders to mean another trade has been chosen, sold to management as a hedge but it is really a method to increase exposure to the same risk factors. Buying stocks and then selling a put contract is the most simple of examples. Buying different stocks withing the same general category is another potential “Texas Hedge.” In other words, a “Texas Hedge” not much of a hedge. The difference with Glenview is they have invested in the potential source of category risk, using this disruption potential as a hedge against investing in the category at the same time. A sophisticated move that, if Genia delivers on its promise, could make this one of the more sophisticated hedge techniques in the anals of professional trader history.