One of the best places to find value is to be on the other side of a big stockholder who is engaged in force selling for uneconomical reasons. Forced selling often results in a huge share price drop despite continued strong fundamentals, and the share price often recovers quickly once the seller stops selling or runs out of shares to sell.
So with that in mind, I was pretty interested in a recent spate of 13-D filings by Hummingbird and this press release about Paul Sonkin going to Gamco. Sonkin is the manager of the Hummingbird fund, as well as a co-author of Value Investing, from Graham to Buffett, the book I mentioned in yesterday’s post on the potential for growth to hurt value.
So, putting two and two together, it looks likely that Sonkin needs to liquidate his fund for his new job and is selling shares.
Do I know that for sure? No… and I actually hope I’m wrong about it. His 13-D filings have served as an amazing source for finding deep value micro caps and net-nets. Plus, while the shares that it looks like he’s been selling have been a bit volatile, you have to give him some credit for being able to get rid of that many shares in stocks this illiquid without completely crushing the share price.
It’s also worth noting that there seem to be plenty of stocks that he is still long , so there’s a chance he was just engaging in some selling before tax rates went up or simply didn’t like the shares any more.
But overall, I think the liquidation story is the most likely.
So what’s the trade here? If Hummingbird is engaging in forced selling, you should be looking to take the other side of the trade. Of course make sure that the shares are cheap, but from my review almost all of his shares are net-nets or very deep value. I’ve personally been adding shares of Surge (SPRS), which it looks like is one of his holdings he’s been forced to sell.
Disclosure- long Surge