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Hedge Fund Manager Bets $123 Million on Walter, Loses

It’s a maxim that even novice investors can parrot with confidence: “Diversify your portfolio.”  But players in the high-powered world of hedge fund investing sometimes go long on a single stock with perceived growth potential — a strategy that led to a very bad week for one hedge fund manager who thought Walter Investment Management Corporation (NYSE: WAC) was worthy of betting the farm.

As RMD reported last week, Walter’s stock plummeted after an earnings call revealed massive quarterly and annual losses, as well as a pair of Department of Housing and Urban Development subpoenas into the Tampa, Fla.-based company’s reverse mortgage operations.

On March 13, the day before the announcement, Walter’s stock closed at $2.70 per share; the next day, WAC tumbled to $1.65, starting a downward spiral that concluded with a close of $1.10 per share on Friday. Standard & Poor’s downgraded Walter’s credit rating from B to CCC on Friday, and Seeking Alpha reported that an analysis by Compass Point, a financial and research firm, puts Walter’s odds of entering some kind of bankruptcy protection at 50-50. As the Tampa Bay Business Journal pointed out, both “B” and “CCC” ratings qualify as Walter’s stock as junk.

Walter’s stock was as high as $7.35 per share as recently as early December, and hit a five-year peak of $47.29 back in March 2013.

This tumble made waves throughout the reverse mortgage community, but hedge fund trader Vadim Perelman might have been the individual most affected: According to Forbes, Walter has been the only U.S. stock in Perelman’s Baker Street Capital Management portfolio since the end of 2015.

Perelman invested nearly $90 million in Walter in early 2014, according to Forbes, even as the mortgage servicer’s stock slid from $35 to about $28. Baker Street’s exposure to Walter then continued to increase as its stock continued its inexorable decline, with Perelman remaining a tireless cheerleader for the company’s prospects. At the end of 2015, Baker Street had $123 million in Walter stock.

Forbes cites a Baker Street presentation from July 2015 called “The WACkiest Disconnect Between Price and Value,” in which Perelman claimed that the stock was wildly undervalued: At a time when WAC was hovering in the teens, Perelman assigned a fair value of $54.

“Over the next 24 months, we believe WAC can grow its servicing business by 40% without using any of its own balance sheet capital,” Forbes reports the presentation as saying. This growth, of course, did not materialize.

Perelman isn’t alone in the beating that Baker Street took on Walter; Birch Run Capital Advisors, a New York City-based hedge fund, held nearly 7.5 million WAC shares as of this past New Year’s Eve, making Walter its second-largest stock by volume and representing almost 12% of its entire portfolio. Birch Run’s manager, Daniel Beltzman, served as chairman of Walter’s board of directors from February 2016 to June 2016, and continues to sit on its board. He also personally owned more than 35,000 shares of WAC stock as of June 2016.

Interestingly, this isn’t Perelman’s first all-in bet on a stock with shaky growth prospects. Back in 2013, stock in steadily declining Sears Holdings accounted for 87% of Baker Street’s U.S. portfolio, with Perelman arguing that the embattled retail chain’s extensive real estate holdings were worth far more than its market cap.

“But by June 2015, Perelman had significantly reduced Baker Street’s exposure to Sears Holdings and his U.S. stock portfolio started to diminish,” Forbes wrote.

Written by Alex Spanko