Here's how top shareholders might help CONN stock

CONN: Dont Risk Your Portfolio With Conns

As markets have been inching down on Tuesday, a particular stock took a pretty hard hit. After releasing its financial results for the third quarter, Conns, Inc. (CONN ) slid by 41% in intraday trading, making CONN stock the top loser on Tuesday.

As investors have been unloading CONN shares, the trading volume amounting to more than 6.1 million shares, which is almost six times more than the average volume. Several investors who have been holding big positions in the company are more affected by the decline than others. So, lets take a look at some of the investors that have been bullish on CONN stock so far and see where they got it wrong.

However, before we get to that, lets see why CONN stock fell today. Conns reported its financial results for the third quarter and posted a 19% increase in revenues on the year to $370.1 million. Both furniture and mattress segment and appliances sales went up by around 37% and 25% on the year, while retail gross margin grew 50 basis points to 40.6%.

However, on the earnings side, Conns reported a loss of 8 cents per share versus 66 cents per share a year ago. The decline in profits came on the back of additional provisions for credit losses. Analysts expected earnings of around 68 cents per share on revenues of $377 million.

Two of the top shareholders of CONN stock are Christian Leones Luxor Capital Group and David Einhorn s Greenlight Capital, Inc. Luxor has raised its stake by more than 150% during the third quarter to 7.59 million shares. At the end of September, Luxor acquired some 1.95 million shares and changed the nature of its stake to activist, even though the fund has not disclosed any plans regarding Conns. The fund initiated a stake at the beginning of March, initially holding 2 million shares, while CONN stock declined by around 42% since then.

More interesting is the case of Greenlight Capital. The fund also added Conns to its equity portfolio during the first quarter, initially holding 3.3 million shares, the company representing one of the funds top small-cap picks. Over the following quarters, Greenlight raised its exposure to Conns as CONN stock has been sliding. In its latest 13F filing, the investor disclosed holding around 3.56 million shares, the position amassing 1.50% of its total equity portfolio. Moreover, in his letter to Greenlights investors for the first quarter of 2014, Einhorn explained why he likes Conns.

Einhorn of Greenlight has been well aware of Conns credit portfolio problems. In his letter, Einhorn mentioned that Conns has had increased credit losses and reduced earnings guidance for the fourth quarter, while its comparable store sales went up by 33% on the year. Even though CONN stock has declined severely on the back of credit risk problems at the beginning of the year, Mr. Einhorn said that Conns still has a chance to recover as it is a retailer with 15% 20% unit growth and current double digit comparable store sales growth. Moreover, the manager of Greenlight added that the market simply overreacted on moderately bad news.

Overall, as our data shows, among more than 700 funds that we track, 22 funds reported long positions in Conns at the end of September, down from 24 funds in the previous quarter. These funds hold around $490 million worth of CONN stock, down by $57 million on the quarter.

So, what does the future holds for Conns? Conns has already announced that its Chief Financial Officer Brian Taylor will step down, and Conns intends to address its credit-financing business problems by adding a Chief Risk Officer position and creating a credit risk and compliance committee. Moreover, we may see activist investors, such as Einhorn and Leone, stepping up and coming up with some measures to help Conns improve its situation.

Disclosure: None.