We sent this via email to subscribers of our free Underrated Small-Cap Stocks newsletter last week. Want it in your inbox and timely – sign up here.
As we ramp up production of our 2nd edition of Underrated Small-Cap Stocks, here’s a quick look at what the under-the-radar hedge fund from our first edition has been up to. With that, Foundry Capital has had several wins of late.
Value Partners Asia ex-Japan Equity Fund has delivered a 60.7% return since its inception three years ago. In comparison, the MSCI All Counties Asia (ex-Japan) index has returned just 34% over the same period. The fund, which targets what it calls the best-in-class companies in "growth-like" areas of the market, such as information technology and Read More
First, Foundry is heavily invested in small-cap stocks, and we all know how volatile small-caps can be. But this is part of what helps create the fact that they generally outperform. Understanding that volatility is not risk is key when investing in value small-caps.
In any case, Foundry booked an over 40% gain for the fund on one of its top holdings last quarter, Telecommunications Systems (NASDAQ: TSYS). Foundry noted in our newsletter that, “Our stocks seems to drift slowly in one direction and then we can make all of our money in a short period of time based on some sort of catalyst actually coming to fruition.”
That’s exactly what happened to Telecommunications, where the company is being bought for $5 in all cash by Comtech Telecommunications (NASDAQ: CMTL) – a big win for Cannell Capital as well. Telecommunications made up over 10% of the Foundry’s fund before the buyout and it locked in an annualized 150% return.
Still, the buyout was only one of the ways that Foundry saw Telecommunications being a big winner for the fund. The other catalysts being selling its 911 business or removing the CEO.
Another stock that Foundry is booking a win with is Omega Protein (NYSE: OME), where it sold about half its position last quarter to lock in a 40% gain. There could still be more upside here, as the stock has pulled back of late – falling 25% in the last month. One possible thesis being that the company needs to separate out the animal protein business – which is strong – from the declining human business.
Foundry told us in the January Underrated Small-Cap Stocks edition that the company should fetch $30 a share in a buyout. As well, part of what’s keeping the stock down is, “So we saw many different catalysts here and worst case it seemed like we could see management sell off parts or the entire business under the activist pressure.”
Notable New Small-Cap
As a bonus, Foundry also made added some new stocks to its portfolio since we profiled the fund. One of its most notable new holding is QLT (NASDAQ: QLTI), which is down 50% over the last year thanks to two failed buyout deals. Still, management remains disciplined and on the hunt, refusing to overpay. But it’s a bit convoluted, which is one of the six small-cap laws, and why certain investors are wrongfully shunning it.
The company recently invested $45 million in a newly formed Canadian pharmaceutical company, Aralez, which will be the combination of Pozen and Tribute Pharmaceutical. Foundry said in our newsletter, “management is very solid, it is selling for less than net cash … QLT management has proven to be adept at creating value, and this is the hidden gem in my portfolio right now.”
Feel free to sign up here to get the Foundry edition and the upcoming issue of Underrated Small-Cap Stocks that dropped next week.
And if you’re not already on it, sign up for our free small-caps newsletter – that’s how you get insights like the above.