The main long-short equity hedge fund operated by Anthony Bozza’s Lakewood Capital Management posted a strong third quarter, bolstering its full-year return.
Bozza, who founded his firm in 2007, manages about $3.5 billion. The firm’s main hedge fund rose 4.3 percent, boosting its gain for the year to 4.55 percent, according to the firm’s third-quarter investor letter and other data obtained by Alpha. Bozza previously worked at New York hedge fund firm SAB Capital Management, at alternative-asset giant KKR & Co., and as a mergers and acquisitions specialist at Gleacher & Co. The firm did not return a call for comment in time for publication.
Lakewood’s long-short fund was also profitable in each of the five previous years, posting three single-digit gains and two low-teens gains. However, what is most interesting about the investor letter is Bozza’s policy of identifying and discussing, in great detail, his favorite short positions. This is extremely rare for hedge fund managers, who generally don’t disclose this information in their letters to clients, who in many cases have trusted them with millions of dollars to invest.
At the end of September, Lakewood was 75.3 percent long and 32.2 percent short, for a net long exposure of 43.1 percent. This is up sharply from a 33 percent net equity exposure at the end of the first quarter. Lakewood was 4.5 percent long and 0.2 percent short fixed income, roughly in line with where it stood in March, at the end of September.
In the third-quarter letter, Lakewood disclosed it initiated several new positions in recent months it believes “can generate attractive returns.” Three of them are long holdings Lakewood started buying in the third quarter: KKR & Co., where Bozza earlier worked; commercial real estate company CBRE Group; and auto dealership network Lithia Motors.
However, what are most interesting are the two short positions disclosed by Lakewood, if for no other reason than it is so rare to see. The two companies are ViaSat and 2U.
Lakewood initiated its short position in ViaSat in the fourth quarter of 2015. The company is a provider of satellite-based broadband Internet access. It owns two satellites and leases capacity on a third.
The hedge fund firm points out that ViaSat sells Internet access mostly to rural and suburban households lacking access to high-quality wireless or wired alternatives. It also has a government services business and an in-flight WiFi business.
Bozza tells investors that the stock has surged 20 percent “despite a significant deterioration in earnings estimates,” asserting that “an upbeat management team has sold investors on a bright future, filled with new satellite launches and future profits.” He says the stock has climbed in large part due to two key customer “wins” in its aviation business. However, Bozza stresses that in-flight WiFi accounts for less than 10 percent of company revenues, and the company faces a lot of competition. So he doubts this business will be a meaningful driver of future company value.
“We expect that the ViaSat of the future will look much like the ViaSat of today, which is a highly levered, barely profitable, low-margin, free cash flow negative business,” Bozza tells clients in the report.
Shares of ViaSat have gained nearly 7 percent since the end of September.
Lakewood is also short 2U, a provider of online education programs that partners with well-known universities to offer online degrees. They include University of Southern California, Georgetown University, and University of North Carolina.
Bozza points out that the stock has nearly tripled since the company went public in March 2014, citing optimism over a new market the company is entering. However, the hedge fund manager believes 2U will have trouble replicating its early results.
“We believe investors are overlooking the business model’s questionable economic value creation potential and an increasingly competitive market,” Lakewood states in its letter. Shares of 2U are down 15 percent just since the end of September.
We earlier noted that in the first quarter, Bozza initiated a short trade in the food-processing business that specifically included Hormel Foods Corp. and Tyson Foods. Hormel specializes in selling processed pork and turkey products, while Tyson is better known for its chicken, pork, and beef products. Since the end of March, shares of Hormel are down about 20 percent, while shares of Tyson are essentially flat.
