5 Key Moves Made by This Chicago-Based Hedge Fund Last Quarter

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Last month, we took a look at Ken Grossman and Glen Schneider's SG Capital Management, a Chicago-based investment advisory firm. Our original analysis focused on SG Capital’s top small-cap holdings, because as we’ve mentioned in our market-beating strategy, this space typically generates the most alpha for investors. Between 1999 and 2009, the 15 most popular small-cap stocks among hedge funds beat the market by more than 15 percentage points per year. This strategy also outperformed tha S&P 500 index by 18 percentage points since September (see details here).

Still, it’s also important to analyze the major changes that occurred in SG Capital’s portfolio last quarter, which is made possible by looking at its fourth quarter 13F filing with the SEC. According to this record, there were a few movers and shakers, so to speak; we’ll detail them below. Let’s get started.

Bearish Bets

At the end of the third quarter, Analogic Corp (NASDAQ: ALOG) and Clean Harbors (NYSE: CLH) were two of Grossman and Schneider's top three investments (see the full list here), so it’s notable that the fund closed out its position in both stocks in Q4.

Clean Harbors, a heavily diversified waste management company, is down 4.6% since the start of February, and optimism over the company’s Safety-Kleen acquisition has been offset by the recent resignation of its CFO. At a PEG in excess of 2.0 and premium book valuation of 30% above its industry’s average, shares of Clean Harbors are not cheap, and it’s likely that SG Capital took its gains sometime after the Safety-Kleen acquisition was announced late last October.

Analogic Corp, meanwhile, has been a solid investment over the past months, appreciating by more than 28 percentage points. The tech company known for its variety of imaging systems has beaten the Street’s earnings estimates in three of the past four quarters, with its latest miss coming when it reported Q1 results last December. Since this negative surprise, which was partially attributed to “market headwinds,” shares of Analogic have still risen 11.8%. It’s possible that SG Capital was satisfied with their gains last fall, and noticed that at 2.1 times book and 21.4 times forward earnings, this stock’s not really a splendid value or momentum play at the moment.

Bullish Bets

On the flip side, SG Capital was only strengthening its positions in two of its top 20 holdings from the previous quarter: MYR Group (NASDAQ: MYRG) and Korn/Ferry International (NYSE: KFY). MYR Group is an electrical contracting company that has beaten analysts’ EPS and revenue estimates in three of the last four quarters, and both top and bottom lines are demonstrating solid expansion. MYR Group is rather cheap using nearly every metric under the sun, and the sell-side expects earnings growth to accelerate very quickly over the next half-decade. Early forecasts project 19-20% annual EPS growth through 2017; shares still trade at a PEG of 0.80.

Korn/Ferry International, meanwhile, has seen a generally bullish human resources industry boost its prospects. The company’s primary focus is on talent management services through executive recruitment programs, for example, and its shares are already up 8.3% since the start of 2013. Like MYR Group, the sell-side expects EPS growth to speed up rapidly over the next few years, and shares of Korn/Ferry still trade at discounted earnings and book value multiples (by double-digits, in percentage terms).  There’s no income here, but ‘growth at a reasonable price’ oriented investors might not be able to find a better play in this particular niche.

In the same ballpark we have WMS Industries (NYSE: WMS), which was a new position for SG Capital in the fourth quarter. According to the hedge fund’s filing with the SEC, the casino and gaming company is now the largest position in its 13F portfolio, worth close to 7.1% of its total holdings. This is the highest conviction bet we have on record for SG Capital, and it’s worth noting that WMS Industries was originally held by the fund in the second quarter of last year before the position was closed out in Q3.

The primary thesis supporting WMS Industries is its broad exposure to the domestic gambling industry, from Illinois to Las Vegas. The company is optimistic about its next-gen gaming cabinets, and the sell-side expects EPS growth near 20% next year. This forecast is far above WMS’s historical average (6.0%) over the past half-decade, and shares aren’t particularly expensive at 1.5 times book and 19.8 times forward earnings. One potential cause for concern is this stock’s percentage of float that’s short—about 11.9%—and investors should watch this indicator closely.

Joining SG Capital in WMS Industries are Ken Griffin, Chuck Royce, and Joel Greenblatt (check out Joel Greenblatt’s favorite stock picks), so there’s clear support from the smart money here. 

This article is written by Jake Mann and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Clean Harbors. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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