| Keith Meister, Corvex Management (Bloomberg) |
Keith Meister’s Corvex Management suffered a big setback on Thursday in its desperate bid to get back to even after a horrendous six-month rout.
Signet Jewelers, a favorite of hedge funds including Corvex, plummeted about 14 percent or so on Thursday after the jewelry retailer reported its first decline in same-store sales in more than six years. The company, known for its Kay Jewelers, Zales and other brands, has also been the subject of allegations that it swapped expensive diamonds for lesser-quality ones.
Signet was Corvex’s fourth-largest single-stock holding at the end of the second quarter, after the New York hedge fund firm boosted its stake by 15 percent.
Meister founded Corvex in December 2010 after spending some eight years working for Carl Icahn.
At the beginning of this year, Corvex managed $7 billion. However, it has been undergoing a rough patch lately.
In 2015’s fourth quarter, its hedge fund, Corvex Partners, lost 9.1 percent, causing the fund to finish the year down 9.2 percent, according to an investor.
The fund followed this dismal performance with a greater than 10 percent loss in the first quarter of this year.
Corvex Management’s strategy to rebound from its early-year rout was to reduce market exposure and amp up the firm’s activism in an effort to boost the portfolio’s noncorrelated returns, according to an investor in the fund, Corvex Partners. This strategy has been underscored by its high-profile involvement with pipeline giant Williams Cos. and streaming music company Pandora Media. The strategy seemed to be working. In the second quarter the fund was up 5.1 percent, cutting its loss for the year to 5.3 percent.
It is not publicly known how the fund has fared since the beginning of July. But its largest holdings had mostly been surging until the Signet setback.
Take Yum! Brands, which is by far its largest holding, accounting for more than $1.7 billion in assets at the end of the second quarter. The stock is up nearly 9 percent since then.
Last October the restaurant company known for its KFC, Pizza Hut and Taco Bell brands agreed to name Meister to its board of directors. It also said it would spin off its China business, as Corvex had recommended. Yum! Brands also changed chief financial officers after Meister joined the board.
Meanwhile, Meister has launched a proxy fight against Corvex’s second-largest holding, Williams Cos. As we recently reported, Meister proposed a slate of ten Corvex employees as directors ahead of Thursday’s nominating deadline. The shrewd, unusual plan is to identify ten more-qualified directors who will eventually replace the placeholding employees. Shares of the pipeline company are up nearly 30 percent since the end of the second quarter.
Title insurer Fidelity National Financial, Corvex’s third-largest single-stock holding, is roughly flat since June. In August, Corvex disclosed in a regulatory filing that it had cut its stake to 4.8 percent.
Then there is Pandora. In May, Corvex disclosed it owned 9.95 percent of the music streaming company, asserting the stock was undervalued and that it had backed off from an earlier plan to launch a proxy fight. It also said it had discussed selling Pandora with the company.
Corvex Management also disclosed that it earlier told Pandora it planned to nominate three individuals to the board for the 2016 annual meeting. However, it agreed to drop these plans after holding several conversations with the board, including with then-CEO and chairman Brian McAndrews. It was thus taken by surprise when McAndrews was replaced as CEO by Timothy Westergren shortly afterward.
In late July, Corvex Management filed a petition with the Federal Communications Commission seeking permission to boost its stake in Pandora to 14.99 percent. That came about a week after the Wall Street Journal reported that Liberty Media Corp. offered to pay $15 per share for Pandora, which thinks the stock is worth closer to $20.
Pandora was Corvex’s seventh-largest long, excluding options, at the end of the June. Since then the stock is up nearly 13 percent to about $14 a share.
Still, despite their huge drop on Thursday, shares of Signet are up more than 1 percent this quarter so far.
Corvex is also heavily hedging its long-only portfolio.
In the second quarter Corvex established large put-option positions on two different exchange-traded funds that track two major indexes — the Russell 2000 Index and the Nasdaq-100 Index.
The firm has also reduced its overall exposure.
For example, at the end of the second quarter, it was 102 percent long and 62 percent short, for a net exposure of 40 percent.
In contrast, one year ago it had the same net exposure, but its gross exposure exceeded 200 percent, suggesting it was using much more leverage at that time.
