Senvest Hedge Fund Gains 79% With Bets on Comebacks
Richard Mashaal and Brian Gonick have set an ambitious target for their Senvest Partners LP hedge fund: Stocks they buy should have the potential to double or triple in price over one to three years.
The strategy worked in 2013, when seven of Senvest’s top 20 holdings surged 100 percent or more, Bloomberg Markets magazine will report in its May issue. Those stocks helped the $550 million long/short fund rack up a return of 79.4 percent for the year. Senvest Partners was the best-performing midsize fund in Bloomberg Markets’ 2013 hedge-fund ranking.
Senvest gained an average of 20.6 percent annually in the 17 years from its inception through December 2013, according to data provided by the fund. Along the way, there have been ups and downs, including moonshots of 229 percent in 2009 and 169 percent in 2003 and a plunge of 54 percent in 2008.
While Senvest today hunts for hidden turnaround stories, it traces its roots to a company that specialized in nabbing shoplifters. U.S.-based Sensormatic Electronics Corp. in the mid-1960s developed electronic tracking tags for retailers, and Mashaal’s father, Victor, bought the Canadian license for the equipment. In 1972, he held an initial public offering of his holding company, Senvest Capital (SEC) Inc. The firm later sold the Sensormatic license back to the U.S. company, which was acquired by Tyco International Ltd. in 2001. Senvest Capital, meanwhile, remains public with shares trading on the Toronto Stock Exchange at C$153 on March 24. That valued the Montreal-based company, which is 70 percent owned by the extended Mashaal family, at C$429 million ($384 million).
For two decades, Senvest Capital made private-equity investments. One bet was on one of Canada’s first pay-TV channels, the younger Mashaal says. After he joined the firm in 1989, the son shifted the company’s focus to publicly traded securities.
For Mashaal, 48, the reason was simple: Stocks were liquid and could be cheaper. Private companies are often expensive, as bidders tend to run up a target’s price at auction, he says. By contrast, public shares may lose favor or be misunderstood or unfollowed, creating the potential for bargains.
So Mashaal opened Senvest Partners in 1997. “Our whole premise since we started the fund is, we’re doing this with our own money anyway,” he says. New York–based RIMA Senvest Management, the fund’s general partner, and its affiliates oversee $1 billion altogether. Of that, about 60 percent is the Mashaal family’s.
The fund managers look for investing situations that Mashaal likens to a pendulum. A good company that’s fallen out of favor may see its stock swing back in a year or two, he says. “It doesn’t have to swing all the way back; it just has to get to neutral and we’ll do quite well,” he says.
If such a company starts delivering positive results over a year or two, its price-earnings ratio may rise as investors jump aboard and analysts raise their ratings, Gonick, 49, says. How that pays off for the firm’s stock picks “is due to sentiment to a large degree,” he says. “But also there has to be some fundamental change and transformation or rehabilitation.”
Coming out of the market meltdown in 2008, Senvest Partners was searching for companies near their bottom, Mashaal says. “It was clearly a financial services, real estate, insurance bust,” he says. “And that’s where we were looking to buy.”
Early on, the fund loaded up on trust-preferred securities issued by entities related to Bank of America Corp., Citigroup Inc. and other banks. The securities were trading at about 20 cents per dollar of par value, Mashaal says. He was willing to be wrong on some of them. “If we were wrong on all of them, the whole world wouldn’t exist,” he says. “We’d all be running around in loincloths.”
As markets recovered, the team looked for a way to play the housing rebound. Homebuilder stock gains had outrun company performance, Mashaal says. So the fund turned its focus to mortgage insurance. The sector “was going from being the worst possible business you could be in -- insuring the value of houses at the peak -- to being the best possible business you could be in, which is insuring the value of houses at the bottom,” he says.
The challenge was figuring out which insurers had the reserves to handle their crisis-era claims. “Where we had to make a call was in our understanding of the accounting, our projections of how claims were going to develop,” he says. “We got up to speed very quickly.”
The firm’s research led it to Radian Group (RDN) Inc., a Philadelphia-based mortgage insurer, which had risen as high as $67 a share in 2007 before crashing to a low of 77 cents the following year. Senvest Partners first bought Radian in 2010, Gonick says, later paying as little as $2 a share. Last year, the stock rose 131 percent to close at $14.12 on Dec. 31.
The firm’s largest holding is Howard Hughes Corp., Gonick says. Shares of the Dallas-based property developer, whose chairman is hedge-fund manager Bill Ackman of Pershing Square Capital Management LP, rose 17 percent this year to $141.43 on March 24.
The key attraction of Howard Hughes, Mashaal says, is its collection of real estate in the U.S., including the South Street Seaport project in New York and locations in Honolulu, Houston and Las Vegas. Says Mashaal: “We just felt like all four of these were home-run type of developments.”
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