Hillside’s fundamental research into the many small and midcap companies that have convertible bonds outstanding has helped us discover turnaround situations with significant upside. In fact, we found enough of these opportunities to use them as the cornerstone for a special situations fund that we began incubating in-house last year. Think of it as sort of a convertible bond portfolio with a delta of 1. (well, less the coupon.)
The returns have exceeded our expectations, with the fund up well over 30% so far in 2016 alone. The fund has benefited from our research in convertible security issuers such as EZCORP (EZPW) and Oclaro (OCLR). We had the advantage of following these companies since they issued their convertible bonds and through the crises that surrounded both of these companies. Since buying EZPW, the stock is up 165% and OCLR is up over 70% (and that is the second time we have owned it). While we have expanded the portfolio beyond names that include convertible bond issuers, we think we come from a unique perspective. A few more examples of what we find interesting are included in this week’s fundamental section. We think the new world order lends itself well to both convertibles and smaller stocks, and that the payoff for independent research in these situations can be substantial. Last week’s pullback in small caps may set the stage for a new, vigorous period in the group. Please feel free to contact us with any requests for information.
(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).