2/13/2013

Everyday I read all the 13D’s (a Form filed with the SEC within 10 days after a Investor or Fund acquires 5% or more of a stock, it can also include letters to management as well) with the SEC, and today I found a great one about one of the stocks we own in our Billionaires Portfolio, Wet Seal (WTSLA).

The Hedge Fund Clinton Group filed a 13D today stating their intentions as well as congratulating Wet Seal for their recent shareholder friendly actions.

Why I want to share this with everyone is that it’s a great example of how Activist hedge funds like the Clinton Group create instant shareholder value and huge returns for investors who piggyback their stock picks.

This is the exact letter written by the Portfolio Managers at the Clinton Group.

“Ladies and Gentlemen:

I write on behalf of Clinton Group, Inc. (“Clinton”), the investment manager of several funds and accounts that collectively own nearly 7 million shares of the common stock of The Wet Seal, Inc. (“Wet Seal” or the “Company”).

We appreciate the swift actions of the new Board, including the appointment of a new Chief Executive Officer, the reduction in overhead costs, the announcement of a share buyback plan and the resolution of various EEOC matters. We believe these actions put the Company on firm ground for future operating improvements and will benefit shareholders and the stock price.

In particular, we estimate that once implemented, the annual cost savings and reduced share count should augment EPS in FY13 by $0.04 and annually by more than $0.06 per share thereafter. At the average price to earnings multiple of the last five years, these early moves by the new team should add more than $0.75 per share to the stock price.

As we have often indicated, given the importance of every day and every penny of EPS, we believe the Company should return all of its excess capital to shareholders as soon as possible. The buyback is one good way to return capital and to take advantage of supply-demand imbalances in the Company’s stock. We applaud you for authorizing that program.

The Company should also adopt a more aggressive approach to returning its significant, excess capital to shareholders rapidly and with certainty. A Dutch Auction self-tender would likely permit the Company to return as much as an additional $35 to $55 million in capital this quarter, reducing the share count and adding almost another $0.06 to EPS in FY14 (and another $0.75 to the stock price).

Given the long-term prospects of the business and our confidence in your ability to continue to affect positive change, we would not be sellers into such a tender offer. But it appears some shareholders are sellers at these price levels; there is no better buyer of their stock than the Company, which has unused shareholder capital at its ready disposal.

We would certainly recommend that the Company retain sufficient cash reserves for its working capital purposes and for future growth in store count. But we also know that every day that goes by while the extra cash remains on the balance sheet, an opportunity to create additional shareholder value dissipates. Certainly, if the Company waits until evidence of the operational turnaround is manifest, the stock price will be much higher and the impact of buying back stock on the remaining shareholders will be substantially dampened. Now is the time to act.

What to take from this letter:
1) .$75 added to Wet Seal’s current share price equals a 25% return not bad!!!
2) How fast shareholder friendly changes can be made to a company when an activist hedge fund takes control.. new CEO, stock buyback etc.
3) Why following these Activist Hedge Funds is like having an Investment Banker, a Lawyer and Hedge Fund on your side…

Just another great letter by a Billionaire Hedge Fund explaining how they can extract huge returns regardless of stock market conditions.

Will Meade
Editor of The Billionaires Portfolio