Richard (Mick) McGuire III’s Marcato Capital Management has been boosting its stake in Life Time Fitness at the same time that Wall Street’s sell side has been souring on the stock.
The San Francisco–based activist hedge fund firm disclosed in a regulatory filing on Thursday that it raised its position in the company to 7.6 percent from 7.2 percent after receiving the go-ahead to boost its stake under the Hart-Scott-Rodino Antitrust Improvements Act. Marcato said it exercised options it already owned and bought more shares.
Marcato also reported that it cut its stake in Lear Corp. to 4.9 percent. As a result, it no longer needs to report updates in its holdings of the stock as long as its position remains below 5 percent of the auto parts maker. Marcato disclosed in late May that it owned 7.2 percent of Life Time, a high-end — read, expensive — health club and gym chain that operates 110 locations, mostly in the Midwest, South and Southeast.
Marcato began buying Life Time’s shares on March 24 and continued to load up on the stock until May 20. However, it did not include the stock in its recent 13F regulatory filing detailing its equity holdings at the end of the first quarter, presumably obtaining a waiver from the Securities and Exchange Commission so it could finish establishing its stake.
The Life Time investment has been very profitable so far for the hedge fund manager. The Marcato International fund got off to a rough start this year, spending most of the time in losing territory. However, it surged 6.4 percent in May alone, enabling it to cut its loss for the year to just 0.29 percent.
A big reason is that shares of Life Time jumped nearly 11 percent in May alone after surging as much as 17 percent at one point last month. Lear chipped in another 6 percent in May.
However, shares of Life Time are now down about 16 percent from their May high, having fallen more than 14 percent in one day on June 5 after Minneapolis-based investment banking and asset management firm Piper Jaffray downgraded the shares from Overweight to Neutral and reduced its price target from $59 to $54.
Analyst Sean P. Naughton seems to be a big fan of the company in general and of its goal to provide services that encourage healthy living, according to a published account of the firm’s note to clients. However, he points out that attracting new members in mature centers “appears to be increasingly difficult.”
Naughton says health clubs with monthly fees are having a tough time in the current economic environment, even companies like Life Time that have differentiated themselves. “We believe the price of a monthly membership may simply be out of reach for some households and optimizing price on the current base may be nearing its end,” he reportedly wrote in his report. “Bottom line, very good vision, excellent operators, outstanding facilities, but believe the next 12 months will provide few catalysts.”
The downgrade came one month after Oppenheimer & Co. reduced its rating on Life Time from Outperform to Market Perform and cut its price target from $54 to $50 even though it stressed in its report that it is optimistic about the company’s prospects. “Weaker membership trends at the chain lately suggest to us that a recent proliferation of smaller format and often lower cost gym alternatives is increasingly luring existing or potential members away from LTM’s large-format facilities,” Oppenheimer adds in the report. “Heightened competitive pressures are unlikely to ease any time soon.” Oppenheimer told clients it does not expect the market to award the stock “a premium valuation” until membership growth consistently strengthens.
As a result of these recent downgrades, just three of nine firms that follow the stock currently have Buy ratings, while two others have Buy/Hold ratings. The rest have Hold ratings.
The stock did rise more than 1 percent on Thursday, to more than $48, presumably on the news that Marcato boosted its stake. At this point McGuire has not publicly communicated a plan for the company.
McGuire founded San Francisco–based Marcato in 2010 after a stint as a partner at William Ackman’s Pershing Square Capital Management, where he worked from 2005 to 2009. While at Pershing Square, McGuire served as the nonexecutive chairman of Borders Group from January 2009 to May 2010. In 2011, Borders filed for bankruptcy and liquidated.
Since launching his own fund, McGuire is best known for taking an activist stake in Sotheby’s before Daniel Loeb’s Third Point launched its proxy fight. Marcato, which manages about $2.7 billion, gained 26.16 percent in 2013 and rose 28.67 percent the previous year.
