New-York based Arbiter Partners Capital Management was founded by Paul J. Isaac back in 2001. Mr Isaac holds a BA from Williams College with Highest Honors in Political Economy. Previous to launching his own fund, he worked in Cadogan Management, as the firm’s CEO, Managing Director and Director. In his long career at Mabon, Nugent & Co., and its successor firms, Mr Isaac worked as Chief Economist. Besides, he is a Co-Owner of Isaac Brothers, LLC and director of Rex Corporation. As for his own fund, he decided to focus mostly on investing in insurance companies. Arbiter Partners Capital Management’s applies a long/short investment strategy, based on external research and bottom-up investing approach.
The fund has gone through some ups and downs regarding its performance during previous several year period. For instance, in 2014 the fund returned negative 1.9%, followed by an even worse drop of -5.6% next year. The following two years, 2016 and 2017, have proved to be stronger, with the returns of 11.4% and 6.33% respectively. The fund’s worst drawdown for this period, with a drop of -22.7%, was in 2018. Arbiter Partners also lost slightly more than 1% during the first half of 2019. However, with an annualized return of 13.9% the fund seems to be standing on a firm ground.
[caption id="attachment_341463" align="aligncenter" width="500"] Paul Isaac of Arbiter Partners Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent.
Our short strategy is based on shorting hedge fund hotels that are likely to experience large hedge fund sales during market weaknesses. We launched this strategy in February 2017. It’s been almost 3 years and the stock picks of this strategy lost a cumulative 27.8% vs. a cumulative gain of 39% for the S&P 500 ETF. This is an absolutely mind blowing performance. The annualized return of our short picks is -9.3%, vs. 12.7% annualized gain for the S&P 500 Index during the same period. The annual alpha of this strategy is 22 percentage points. Jim Chanos doesn’t generate this kind of performance. The best thing about this short strategy is that it provides an excellent hedge during market meltdowns. For example, in Q4 of 2018 when the S&P 500 Index lost nearly 14%, this strategy’s picks lost 25% protecting our premium subscribers from large losses (see the details here).
Our newsletters are successful because we follow hedge fund managers like Paul J. Isaac to identify the best and worst hedge fund stock picks. In this article we are going to take a look at Arbiter Partners Capital Management’s top stock picks. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. We noticed that none of Arbiter Partners Capital Management’s stock picks are among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
As Arbiter Partners Capital Management’s fifth top stock pick for Q3 2019 was Intelsat S.A. (NYSE:I). Mr Isaac decided to cut the position by 22%, which brought it down two places lower in the fund’s portfolio. However, other hedge funds seem fond of the company. During Q3 there were 55 shareholders investing in the company, which is 10 hedge funds more compared to the previous quarter. Among them, Silver Lake Partners was Intelsat S.A.’s top shareholder, with a stake worth $224 million. Right behind it, amassing large portions of their portfolios to the company were Point State Capital, Discovery Capital Management, and Whitebox Advisors. We have been recommending IntelSat as a short between November 2018 and November 25th, 2019. The stock got destroyed during the Q4 of 2019 and we closed our short recommendation.
Greif, Inc. (NYSE:GEF) was at the fourth place in the fund’s portfolio for Q3. The fund cut this position by 12%, and it seems that the other investors are losing interest in the company as well. There were only 14 hedge funds bullish on the stock at the end of Q3, which is a drop of 33% compared to the previous period. Arbiter Partners Capital Management was Grief Inc’s second top shareholder. The fund reported holding $16.2 million position, comprising 2.9% of its portfolio. The company’s top shareholder was GAMCO Investors, which reported holding $29.9 million worth of stock. Other hedge funds interested in the stock during Q3 were Citadel Investment Group, Marshall Wace, and D E Shaw (read more detail here).
A new addition took the third place in Arbiter Partners Capital Management’s portfolio in Q3, Stereotaxis Inc (NASDAQ:STXS). The fund was the company’s second largest shareholder, holding a stake worth $16.4 million. There was a total of 7 hedge funds tracked by Insider Monkey bullish on the stock. Interestingly, Stereotaxis Inc was the new addition to all these investor’s portfolios except one, which was also the company’s top shareholder. That was DAFNA Capital Management, whose Principal is also Stereotaxis Inc’s Chairman and CEO. This fund filled and amended 13D, and until recently was the company’s only shareholder. DAFNA Capital Management held $48 million worth of stock at the end of Q3.
At the second place in Arbiter Partners Capital Management’s latest 13F fillings was Capital Senior Living Corporation (NYSE:CSU), boosted by 1% during the quarter. The fund was also the company’s top shareholder, holding the most valuable stake in the company, worth $19.9 million, which is 3.6% of the its portfolio. Apart from Arbiter Partners Capital Management, there were 9 more hedge funds interested in the stock, a decline of 33% since the previous quarter. Among other company’s top shareholders were Cove Street Capital, Coliseum Capita, and Renaissance Technologies.
The fund’s top stock pick for Q3 2019 was Cowen Inc. (NASDAQ:COWN), remaining at the first place since the previous two quarters. The other investors’ interest in the company is also stagnating, having 19 of hedge funds bullish on the stock, the same number as a quarter ago. This is, however, a higher figure than a year ago, when 15 hedge funds were investing in the stock. Arbiter Partners Capital Management held the largest position in the stock, worth $25.6 million, comprising 4.6% of the fund’s portfolio. Other hedge funds bullish on the stock were D E Shaw, Ariel Investments, and Balyasny Asset Management (as you can read in more detail here).
Disclosure: None. This article was originally published at Insider Monkey.