The Morning Brief: Eminence Loses its Shirt as Men’s Wearhouse Stumbles
Talk about bad timing. Back in June Ricky Sandler’s Eminence Capital sold more than one million shares of The Men’s Wearhouse for between $57 and $58 per share, reducing its stake to 6.6 percent. He must now be kicking himself for not unloading all of his shares at the time. In fact, he must be double-kicking himself for recently raising his stake to 9.9 percent. Sure, the stock immediately jumped 7 percent on that news to $41.23. However, on Friday, the stock plummeted more than 43 percent to close at just $22.70 after reporting that in the third quarter comparable sales at its Jos. A. Bank stores fell 14.6 percent, “far below the company’s earlier expectations,” according to a press release. The company blamed the phase-out of its Buy-One-Get-Three promotions. Now, Sandler could buy one share for the price of nearly three when he started selling in June.
Remember, two years ago Sandler aggressively urged Men’s Wearhouse to merge with Jos. A. Bank.
Other possible losers include two hedge funds that were major holders at the end of the second quarter—New York’s Samlyn Capital, its ninth largest holding, and Boston-based Adage Capital Partners. The stock was also the fourth-largest position of New York-based LionEye Capital Management, headed by Stephen Raneri.
This has been a rough stretch for Sandler. In late October, we pointed out that he took a big hit when Pittsburgh, Pennsylvania’s GNC Holdings plunged more than 14 percent after questions were raised about certain supplements it was selling. The stock has rebounded somewhat since then. Eminence is the health-products retailer’s third-largest shareholder.
Daniel Benton’s Andor Capital Management is the first high-profile hedge fund to file its 13F disclosure covering third-quarter holdings. The Rye Brook, New York tech specialist reported a U.S. stock portfolio of $636 million, down more than 40 percent from $1.1 billion the prior quarter. Elon Musk’s carmaker Tesla Motors, based in Palo Alto, California, remains his largest holding, now accounting for 39 percent of assets. The stock was down just 7.4 percent for the quarter. Alphabet (the publicly traded holding company for Google) is a distant second, accounting for 10 percent of assets.
A bill was introduced in the House of Representatives that would require hedge funds to become much more transparent. Rep. Nydia Velazquez, a New York Democrat, wants the funds to disclose a stock holding when they acquire at least 1 percent of the shares—versus the current 5 percent—and reveal the position within five days, instead of the current 10 days. In addition, Rep. Velazquez wants hedge funds to disclose all investments of at least 1 percent—whether stocks, corporate bonds, municipal bonds—every quarter. This includes derivatives such as options and swaps, which are sometimes used “to skirt reporting requirements,” the announcement stressed. Currently investors must disclose all stock holdings within 45 days after a quarter ends.
The bill, H.R. 3921, is called the “Hedge Fund Sunshine Act,” and is in response to hedge funds’ investments in the distressed bonds of Puerto Rico. “It has become increasingly clear that hedge funds, which have purchased a sizeable part of Puerto Rico’s debt, are exacerbating the crisis and profiting from the island’s misery,” Velázquez says in a press release. “This bill will allow regulators and the public to see exactly what role these funds are playing in Puerto Rico’s financial crisis and in our broader economy.”
Of course, you can expect hedge funds to push back hard on this effort. Hedge funds value their secrecy and will argue that if they disclose smaller positions more frequently they will wind up paying more for the full targeted stake since other investors will often buy these securities once they are made public. Let’s see whether any of the presidential candidates latch onto this one.
Now it’s time for the daily saga called Valeant. In today’s episode, Montreal, Canada-based Valeant Pharmaceuticals International said nearly 1.3 million shares held as collateral by Goldman Sachs to secure loans made to chairman and CEO J. Michael Pearson were sold Thursday. This could help explain why the embattled drug company’s stock plummeted that day. “Since joining Valeant, I have not sold any shares provided to me as compensation, and it was not my desire that shares be sold now,” Pearson said in a statement, not mentioning he put so many shares at risk to be sold. “I have complete confidence in Valeant’s ability to move forward and continue meeting our commitments to patients, doctors, and shareholders.” The stock Friday climbed 3.81 percent to close at $81.77.
The HFRI Weighted Composite Index rose 1.7 percent in October. It is now roughly flat for the year. The equity hedge index led the way last month, up 3.2 percent, its best month since January. “Equity, credit and event-sensitive strategies led October performance, driven by the improvement in many steeply-discounted positions, long/short opportunistic trading, and broad-based gains in equity market indices,” says Kenneth Heinz, president of HFR, in a press release.