How Did This Hedge Fund Return 25% Last Quarter?
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Artis Capital Management was a top performing hedge fund during the third quarter. Coming in with the fourth best Q3 performance, the fund’s long stock picks had a weighted average return of 25.5% during the first half of the year, and returned 24.6% for the third quarter, boosting the fund’s year to date performance to 56.4%. Artis Capital was founded in 2001 and is a San Francisco-based hedge fund with a focus on public technology companies.
We track over 400 funds and investors, and have calculated the value-weighted returns for all the funds in the 1500 largest stocks, while compiling a list of the top performing funds for the first three quarters of 2012. The returns are based on the fund’s 13F long positions only, as we do not have access to their short positions.
Artis’ top investment according to its 2Q 13F was KiOR (NASDAQ: KIOR). KiOR is a development-stage renewable fuels company, with a focus on producing gasoline from non-food biomass. The company has a sub-$600 million market cap and is up only 3% for 3Q. However, it was Artis’ top pick by far, with the firm having over 25% of its 2Q 13F portfolio invested in the company. KiOR is not yet profitable and posted most recent earnings that were in line with estimates at a loss of $0.22 per share. The company has launched its first plant and plans to start shipping oil products by the end of the year. Yet, its shares still remain down 35% since the company's mid-2011 IPO, and have seen a number of insider sales of late.
Rounding out Artis’ top five picks according to its 2Q 13F are Fusion-IO (NYSE: FIO), OmniVision Technologies (NASDAQ: OVTI), Sonus Networks (NASDAQ: SONS), and IMAX Corporation (NYSE: IMAX). Artis has a relatively concentrated portfolio with over 55% of the firm’s 13F invested in these five holdings. Fusion-IO helped carry the fund into the "green" for 3Q. Even though KiOR was relatively flat, Fusion-IO was up over 40% and made up 10% of Artis’ 13F. The storage memory platform producer is down almost 10% this week as its most recent quarterly earnings came in at $0.04, compared to $0.07 for the same period last year. Prior to the earnings announcement, Pacific Crest placed an outperform rating on the stock, citing a shift to flash silicon as the growth driver and placing a $38 price target on the stock.
OmniVision, like KiOR, was flat through 3Q. The semiconductor company is expected to see revenues up 44% in 2013 on rising global demand for consumer electronics. Mobile phones account for half of OmniVision’s revenue, and the increasing number of smartphone users is expected to be a driver of the expected 15% annual earnings growth for the next five years. For Artis’ top two holdings—KiOR and Fusion-IO—the firm was the most notable fund manager, however, Artis has good company in OmniVision, with both Ken Fisher and Chuck Royce owning over 2.5 million shares each.
Sonus was down almost 10% for 3Q, but only made up about 6.3% of Artis’ 13F. Sonus’ multimedia infrastructure solution sales are highly volatile given a concentrated customer base—the company has a beta of 1.75. AT&T and Bahamas Telecommunications accounted for 26% of Sonus’ 2011 revenues. The company’s cash position makes up almost 40% of its market cap, which gives it the capital to grow, but it's expected to take time for the company’s new initiatives to take hold.
IMAX is a top pick of Tremblant Capital and a notable pick of Alydar Capital. Tremblant and Alydar Capital both owned over 2.7 million shares and had over 4% of their 2Q 13F portfolio invested in the motion picture technology company. IMAX, like Sonus was down in 3Q, only a bit more, at 15%. IMAX recently saw an upgrade from Susquehanna, citing valuation as the key reason. Susquehanna analyst Vasily Karasyov noted that the first half of the year was weak for IMAX given the lack of any real catalyst. The company is transitioning away from family titles toward fanboy movies and is expected to grow EPS around 22% annually for the next five years.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Fusion-io and Imax. Motley Fool newsletter services recommend Imax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.