Glenn Welling’s famous activist hedge fund, Engaged Capital, had down second quarter, subtracting -3.22% and taking the year to date performance to -0.49% at a time when the HFRI Event Driven Index is up 2.09%, a June 30th investor letter reviewed by ValueWalk said. Welling’s mid-cap focus involves a different beta than the larger cap activist fund managers.

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Engaged wants Jamba to get out of New York City stores

In 2014 Welling left the $6 billion Relational Capital to start Engaged, where he now manages $624 million. He is a member of the Board of Directors many of the firms in which he invests, including Jamba, Inc., a NASDAQ listed leading restaurant retailer of what he describes as “better-for-you food and beverage offerings.”

Engaged thinks Jamba’s valuation, which represents 9.3% of the portfolio, does not reflect true value, pointing to upside potential through cost cutting and a more robust refranchising effort. “Multiple expansion should also result from successful execution of this strategy,” the investment letter said.

Engaged is advocating with management Jamba Juice sell its unprofitable New York City stores and re-franchise other company-owned locations.

Engaged Capital major holdings

Rovi needs to “stop value destruction”

Welling also sits on the board of Rovi Corporation, a NASDAQ listed provider of digital entertainment technology solutions. Representing 18.81% of the portfolio, ROVI is one of three technology stocks in the fund’s top seven holdings.

Engaged looks at Rovi and thinks common valuation excludes “any impact from license renewals with two large customers who currently do not pay license fees.” He further believes consensus forecasts are not reflective of improvement in cost structure or sustainable revenue growth from the firm’s new product strategy.

Sitting on the board of directors, Welling is likely to have influence to achieve his objectives. At Rovi, that means financial engineering.

Engaged wants the company to “stop value destructive” mergers and acquisitions, manage cash so as to facilitate share repurchases, reduce the firm’s cost structure “by stopping inefficient R&D spend and reducing corporate overheads.” Once these fundamental aspects are in place, the company should “re-present” itself to investors “with clear long-term value proposition, augment board with new directors with capital allocation/operating efficiency expertise.”

Engaged performance

Engaged Capital sees value in Medifast and Outerwall and may force investors to see the same value through an increased dividend

Welling also serves on the board at Medifast, Inc., a firm Engaged categorizes as a consumer staple company. Engaged has 11.9% of the fund’s capital dedicated to the NYSE listed manufacturer of medically based, proprietary healthy living and meal replacement products.

Engaged likes the valuation of the firm, particularly given “the size and stability of the company’s cash flows,” its variable cost structure as well as potential for growth, which is sometimes more difficult to quantify than certain financials. “The company’s overcapitalized balance sheet also provides downside protection and capital allocation flexibility,” the letter opined.

Much like Rovi, with Medifast Engaged wants to “discourage risky M&A,” strengthen the management team “with strong industry expertise,” as well as “improve corporate governance, develop a credible long-term strategic plan for the business, and improve investor communications.” In other words, Medifast seems like a serious turnaround story on multiple levels.

If the company can’t create serious value, they should explore strategic alternatives such as going private, Engaged advocates.

Among the firm’s other interesting holdings is a big allocation of 11.8% of fund capital to Outerwall, where the activist owns 15% of outstanding shares. Despite declining business in Redbox video distribution kiosks, the cash flow the company generates from this and its Coinstar business of counting coins and taking a percentage is positive.

Engaged Capital Flagship

With this firm, Engaged Capital wants to initiate a sales process that might take the company private as a way to maximize shareholder value. If this doesn’t work to lift share prices, Engaged wants to get forceful. “If a sale is not feasible, institute a large dividend to force the market to value OUTR’s sizable cash flows.”

With the recent Outerwall buyout this question is likely moot. As the fund itself notes:

Post the close of the quarter, OUTR announced the successful conclusion of their strategic alternatives process with a sale to Apollo Global Management for $52 per share.