Corsair Capital Management Exits Colony Northstar After Difficult Q1Michelle Jones
The first quarter took a bite out of hedge funds across the industry as the widespread market correction struck down virtually every portfolio manager. Corsair Capital Management said in its Q1 2018 letter that almost everything flip-flopped during the quarter. However, value stocks continued to underperform, so Corsair Capital underperformed the broader market.
Corsair Capital was down 2.9% net in Q1 2018
ValueWalk obtained the Corsair Capital Management Q1 2018 letter, which reveals that the firm was down 2.9% net in the quarter, underperforming major indices. The Corsair Select fund lost 4.4% net during Q1 2018. The HFRI – EHI gained 0.7% during the quarter, while the S&P 500 was down 0.8% and the Russell 2000 was down 0.2%.
All of the major stock indices in the U.S. experienced corrections with declines of more than 10% from their recent peaks during the first quarter. February was a difficult month all around, as the VIX spiked suddenly, soaring from historical lows and setting a new record for its largest move in a single day. The Dow Jones Industrial Average also remained highly volatile, Corsair noted, with five consecutive days with intra-day moves of 500 points or more, followed by one week with two days of declines greater than 1,000 points. Q1 2018 seemed a complete reversal of all of 2017, during which it looked like the markets would never slow down.
Two aspects of the market that remained the same were the flow of money into passive funds and the continued weakness in value stocks, which continued to lag growth during the first quarter. Corsair Capital managers believe these are indications that investors continued to add to positions that had already increased and avoided stocks that had not, but they recommend the opposite course of action: trimming what “has worked” and adding “a bit to what is out of favor.”
Corsair Capital exits Colony Northstar
Corsair Capital exited Colony Northstar during Q1 2018. The position took a massive bite out of the firm's returns during the quarter on the back of a massive cut to the company's dividend and disappointing fourth-quarter results. Corsair had already cut its position in Colony Northstar before the earnings release due to concerns about the lower-than-expected outlook for this year's dividend, which was 44 cents per share.
The firm's bull thesis for Colony was originally based on the company's “ability to shift from a balance sheet intensive owner of disparate real estate assets to a balance sheet light investment manager.” Corsair had expected this transition to spark a positive re-rating for the company's stock, but that never happened because the company's asset performance remained weak. Colony management also proved to be unable to reinvest “meaningful proceeds” into important new verticals and couldn't raise material amounts of capital from third parties.
Struck by Ferroglobe, Sinclair Broadcasting and FMC Corp
Unfortunately, since value stocks continued to underperform in Q1, the list of major detractors from Corsair's returns was rather long. Ferroglobe plunged after the ITC ruled against it, as the market had been predicting a positive ruling. Although the firm did not say that it exited the position during the first quarter, it did say that the negative trade ruling “removes the substantial near-term upside from U.S. silicon pricing.”
Sinclair Broadcasting also took a bite out of the firm's Q1 returns as it plunged 17%, although Corsair Capital managers feel their bullish thesis remains intact, despite the setbacks experienced during the quarter. Sinclair stock soared initially, driven by rumors about a potential deal with the Department of Justice on the Tribune Media acquisition. Unfortunately, the tides turned during Q1 following a weak outlook for local ads during the quarter and “a misunderstood quarterly cadence of ‘net retrans' growth,” the firm added.
FMC Corp was also a major losing position for Corsair Capital, as the market turned bearish on the lithium market due to Sociedad Quimica y Minera de Chile's announcement that Chilean regulators agreed to let it quadruple its production capacity in the next seven years. Even though the market seems generally concerned about a potential oversupply of lithium, Corsair Capital managers disagree and expect the lithium market to remain “healthy,” with FMC a key beneficiary.
IAC/ InterActiveCorp was the big winner for Corsair Capital
The firm highlighted only one big winner during Q1 2018. Shares of IAC/ InterActiveCorp surged 28% during the quarter thanks to a strong earnings beat for Q4. Corsair Capital managers believe IAC should be trading at a premium on its net asset value rather than a massive $1.4 billion discount.