DELAFIELD, Wis. (Stockpickr) -- Whenever I see a large investor take a stake in a small-cap company, I perk up and pay full attention. Hedge fund operators and large asset managers don't just buy small-cap stocks on whim. They do a ton of fundamental work and they pick their spots carefully.
Usually, when these large investors take their stakes, they're doing it for the long haul. Just the disclosure of their position will increase the volatility in the underlying equity dramatically. They know that other traders will gun against them once their moves are made public, so they need to see opportunity for huge returns in the stocks they choose. Often they'll seek out a distressed stocks that they think the market has mispriced.
Small-cap stocks aren't for the faint of heart, so whenever I see a large fund take a significant stake in one, I like to dig into the equity and see how it looks from not just a fundamental perspective but also a technical perspective. If I see positive developments from both angles, I might look to piggyback the large funds' moves.
One small-cap stock that a large fund took a significant stake in is Town Sports International (CLUB), which, together with its subsidiaries, owns and operates fitness clubs in the Northeast and Mid-Atlantic regions of the U.S. This stock has been absolutely destroyed in 2014 by the short-sellers, with shares off sharply by 54%.
Town Sports International has a market cap of $160 million and an enterprise value of 395 million. This stock trades at a premium valuation, with a trailing price-to-earnings of 38 and a forward price-to-earnings of 76. Its estimated growth rate for this year is -119%, and for next year it's pegged at 200%. This is not a cash-rich company, since the total cash position on its balance sheet is $76.17 million and its total debt is $314.87 million. This stock currently sports a large dividend yield of 11.1%.
As I stated above, shares of CLUB have been hammered lower, dropping sharply from over $14 at the start of year to a recent 52-week low of $5.65 a share. That massive drop has attracted HG Vora Capital Management to the stock, and the firm has revealed a 12.7% stake in CLUB per an SEC filling. HG Vora recently upped its stake in CLUB to 3.1 million shares from its previous position of 1.30 million shares. During its most recent purchases, HG Vora was buying shares of CLUB at around $5.98 to $6.28 a share.
HG Vora Capital Management is an event-driven, value-oriented investment firm, run by Parag Vora, who previously worked at multi-strategy hedge fund Silver Point Capital and was a vice president at Goldman Sachs Group. Regarding its investment in Town Sports International, I think HG Vora is buying up shares here because it sees a deep value situation developing.
During Town Sports International's last earnings report, the company reported some disappointing figures, including a drop in total member count of 1,000 members, to 496,000 at the end of the first quarter of 2014. This compares with an increase of 2,000 members in the first quarter of 2013. Revenue also dropped by 2.7% in the first quarter of 2014 vs. the first quarter of 2013, and comparable club revenue fell 4.7% in the first quarter of 2014 vs. a drop of 2.4% during the first quarter of 2013. The company blamed its problems on near-term challenges in attracting members and higher-than-anticipated operating expenses driven in large part by cold winter weather in the Northeast.
There's no sugarcoating the poor results and deteriorating fundamentals for Town Sports International, and the stock has reflected that poor performance with shares dropping sharply from 2014 highs. That said, the stock has now entered technically oversold levels, and it pays a very solid dividend. Plus, the company said on its last conference call that it plans to target around 5% of its lower-performing clubs for closure. This company is clearly looking to cut costs and make more strategic investments to help right the ship. If it can achieve that even marginally, then this oversold stock could easily make a powerful move higher off its depressed levels.
If you consult the chart for Town Sports International, you'll notice that following that massive drop in the first-half of 2014, this stock has now stabilized after it formed a triple bottom chart pattern at $5.70, $5.65 and $5.69 a share.
Shares of CLUB have recently broke out above the upper-end of its recent sideways trading chart pattern at around $5.99 to $6.25 a share with strong upside volume flows. That breakout has now pushed shares of CLUB back above its 50-day moving average of $6.29 a share, and it's quickly pushing this stock within range of triggering another major near-term breakout trade.
Traders should now look for long-biased trades in CLUB as long as it's trending above its 50-day moving average of $6.29 or above more near-term support levels at $6 or at $5.70 and then once it breaks out above some near-term overhead resistance levels at $7 to $7.12 a share with high volume. Look for volume on that breakout that registers near or above its three-month average action of 233,849 shares. If that breakout materializes soon, then CLUB will set up to re-test or possibly take out its next major overhead resistance levels at $8 to $8.50 a share. Any high-volume move above those levels will then give CLUB a chance to tag $9 to $9.36 a share. A large gap back towards $10.50 sits right above $9.36 a share as well.
This stock also has a lot of shorts involved in the name, since the current short interest as a percentage of the float for CLUB is 11.9%. That means that out of the 12 million shares in the tradable float, 1.50 million shares are currently sold short by the bears. This low-float, high-short-interest situation for CLUB makes this one stock you'll not want to be caught short in if any positive fundamental news hits, since it won't take much buying pressure to force the shorts to start covering.
-- Written by Roberto Pedone in Delafield, Wis.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.