In this article, we discuss the 10 top stock picks of a former SAC Capital equity analyst Jonathan Tepper.
Jonathan Tepper, the chief investment officer of little-known hedge fund Prevatt Capital, has an interesting approach towards investing. Tepper, whose stock picks generally focus on quality and value of firms, believes that investors would be better served learning about the modern history of finance, as it relates to the rise and fall of big businesses as well as financial meltdowns, instead of being bogged down by economic theory based on mathematics that might not play out in the real world as it does in books. Tepper leads Prevatt Capital which had a 13F stock portfolio worth more than $296 million at the end of the first quarter of 2024.
Tepper is the author of The Myth of Capitalism, a book that dives deep into the public policy surrounding industrial concentration in the United States and the rise of powerful monopolies. Tepper, in a recent appearance on Capital Allocators with Ted Seides, a finance podcast, underlined that his investing thesis was based on his studies about powerful monopolies that were owned by investors he admired. Tepper noticed how a lot of these monopolies were businesses that, if they did not exist, somebody would have to invent them. He remarked that he thus learned to invest in firms that had a natural reason for existing.
His comments can be seen in action if we look at the latest financial disclosures of his hedge fund. More than 60% of the stock portfolio of Prevatt Capital is concentrated in the consumer goods and services sectors. Tepper has doubled down on many of his long bets, increasing stakes in four of the top ten stocks in the portfolio of Prevatt Capital during the first quarter of 2024. The total value of the 13F portfolio has increased by more than $25 million in the first three months of the year due to this buying activity, compared to the previous quarter. His top ten holdings comprise nearly 80% of the total portfolio.
There are several reasons why Tepper prefers the value-based long term investing approach of his mentors to create wealth, as opposed to the shorting strategy adopted by many other hedge fund managers on Wall Street. Some of the reasons include short squeezes, lots of hype around new firms, high borrowing costs, and several funds shorting the same firms. In contrast, a value-based approach creates wealth at a healthy pace and avoids permanent loss of capital or significant drawdowns. Buying quality firms also comes with the added benefit of strong cash flows, steady dividend payouts, and thoughtful share buybacks to increase value.
Our Methodology
For this article, we scanned the stock portfolio of Prevatt Capital according to the 13F filings submitted at the end of the first quarter of 2024. We selected the top 10 stocks from this portfolio. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Stocks
Top Stock Picks of Prevatt Capital
10. Sysco Corporation (NYSE:SYY)
Number of Hedge Fund Holders: 46
Prevatt Capital’s Stake: $19,483,200
Sysco Corporation (NYSE:SYY) distributes food and related products. Tepper only invests in companies that have wide moats, and Sysco Corporation (NYSE:SYY) has shown over the years that it holds significant competitive advantages over peers. For example, the firm is the largest distributor for food and related products, evidenced by the 16% market share it holds in the US foodservice market, more than double that of the nearest competitor. It has also shown historical resilience in the face of recessions, most recently in the 2007 financial crisis during which the company grew revenues and maintained gross profit margins.
As the food business returns to growth after a long post-pandemic recovery arc, the company is well-positioned to rake in new business with higher inventory levels, superior customer service, and the ability to provide value and confidence to new customers as a result of existing partnerships with top restaurant brands, especially in view of the national shift in the US from smaller, independent restaurants towards chain and national brands. A couple of months ago, Sysco Corporation (NYSE:SYY) posted earnings for the third quarter of 2024, reporting earnings per share of $0.96, beating market estimates by $0.01. The revenue over the period was $19.4 billion, up more than 2.5% compared to the revenue over the same period last year.
In its Q1 2024 investor letter, Diamond Hill Capital, an asset management firm, highlighted a few stocks and Sysco Corporation (NYSE:SYY) was one of them. Here is what the fund said:
“Portfolio activity has remained modest as valuations have risen, and it is increasingly challenging to find high-quality companies trading at interesting valuations. However, we did identify two new investments in Q1: Sysco Corporation (NYSE:SYY) and KeyCorp.
Sysco is the market-share leader in the US food-service industry, in which scale and size are critical. We believe Sysco is exiting the pandemic in a stronger position after investing organically and inorganically in its business. It is well-positioned to harvest these investments over the next several years. However, Sysco trades at a discount to its historical multiple, which we think makes for an attractive entry point into this high-quality company.”
9. Keurig Dr Pepper Inc. (NASDAQ:KDP)
Number of Hedge Fund Holders: 48
Prevatt Capital’s Stake: $21,469,000
Keurig Dr Pepper Inc. (NASDAQ:KDP) is placed ninth on our list of top stock picks of Prevatt Capital. The firm operates as a beverage company in the United States and internationally. The bullish thesis around Keurig Dr Pepper Inc. (NASDAQ:KDP) centers on the strong brand portfolio of the firm, the diversified product range it boasts, and the vast distribution network it has cultivated over the years. The firm has a strong presence in the coffee and soft drinks market. For example, the company owns popular brands like Dr Pepper, Snapple, and Keurig, with Dr Pepper ranked among the top five carbonated drinks consumed in the US.
The diversified product range of the firm relies heavily on research spending, with the company spending $100 million every year to stay ahead of industry trends. The distribution reach of the firm is also impressive – Keurig Dr Pepper Inc. (NASDAQ:KDP) serves more than 1 million retail locations across the North American continent. Another sign of the value proposition of the stock is institutional ownership. More than 66% of the shares in the firm are owned by large financial institutions. Top and bottom line growth for the firm is on an upward trend, with earnings up 12%, compared to 10%, and revenue increasing from 2% to 3% last quarter.
8. Booking Holdings Inc. (NASDAQ:BKNG)
Number of Hedge Fund Holders: 97
Prevatt Capital’s Stake: $22,492,856
Booking Holdings Inc. (NASDAQ:BKNG) comes in at eight place on our list of top stock picks of Prevatt Capital. It provides travel and restaurant online reservation and related services worldwide. Booking Holdings Inc. (NASDAQ:BKNG) has been featured in the Prevatt portfolio since the fourth quarter of 2023. The stake is worth close to 7.6% of the total portfolio. Tepper did not add to the stake in the first quarter of the year. The strong competitive position of the company can be illustrated using several key metrics, like revenue, gross bookings, earnings, and website traffic, among others.
Booking Holdings Inc. (NASDAQ:BKNG) posted more than $17 billion in revenue in 2022, behind only large travel groups like airlines and hotels, showcasing the dominant position it enjoys in the online travel industry. The firm achieves this through ownership of brands like Booking.com, Priceline, and Agoda. The company also has an extensive user base, allowing it to post record transaction volumes. In 2022, the firm posted $120 billion in gross bookings. Latest estimates suggest that over 500 million users visit the Booking.com’s websites every month, highlighting the popularity and reach of the brand worldwide.
In its Q1 2024 investor letter, Wedgewood Partners, an asset management firm, highlighted a few stocks and Booking Holdings Inc. (NASDAQ:BKNG) was one of them. Here is what the fund said:
“Booking Holdings Inc. (NASDAQ:BKNG) contributed negatively to relative performance. The Company grew bookings on their platforms +16% and reported +22% growth in adjusted operating income during their fourth quarter of 2023. We think the market is cautious about the Company’s results for 2024 because they will be lapping very high levels of growth compared to those in 2023 (full year 2023 bookings growth +24%). However, Booking’s end markets continue to be quite healthy, outside of geographies affected by war because consumers still have plenty of wallet share to re-dedicate to travel compared to pre-COVID-19 numbers. We applaud the Company as they aggressively repurchase shares at valuation levels well below the market and peers. This should serve to compound our ownership in Booking’s business, which has exceptional pro2itability.”
