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.”
7. H&R Block, Inc. (NYSE:HRB)
Number of Hedge Fund Holders: 26
Prevatt Capital’s Stake: $22,590,600
H&R Block, Inc. (NYSE:HRB) is seventh on our list of top stock picks of Prevatt Capital. The firm provides assisted income tax return preparation and tax return preparation services to the general public. In early May, H&R Block, Inc. (NYSE:HRB) posted earnings for the third quarter of 2024, reporting earnings per share of $4.94. The revenue over the period was $2.2 billion, up 4% compared to the revenue over the same period last year. The firm derives value from stable revenues, a strong dividend yield, and efficient equity utilization, despite having a somewhat higher leverage.
The following metrics reflect the wide competitive moat of the firm. H&R Block, Inc. (NYSE:HRB) has a Price-to-Earnings (PE) ratio of around 12, lower than the industry average and highlighting the undervalued nature of the stock. It has an unblemished payout history and offers a strong dividend yield of 3.6%, making the stock attractive for investors who value passive income. Despite a high debt-to-equity ratio, the stable cash flows of the firm suggest it can manage to bring this ratio down in the coming months. H&R Block, Inc. (NYSE:HRB) prepares around 12 million tax returns annually in the US, 6 million of which are online.
In its Q3 2023 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and H&R Block, Inc. (NYSE:HRB) was one of them. Here is what the fund said:
“In the consumer discretionary sector, tax preparer H&R Block, Inc. (NYSE:HRB) was a winner. Revenues contracted in the recent quarter but were better than expected, sending shares higher. Revenue growth was held back by lighter US industry tax filing volumes during the 2023 tax season, due in part to a year-over-year normalization of stimulus filers, in addition to market share losses in the assisted category. Some share losses are due to competition, but also a factor is a continued shift among filers to HRB’s cheaper DIY (do-it-yourself) option. While recent growth has been disappointing, HRB remains a dominant provider in assisted tax prep, a cash cow that is a relatively predictable, non-cyclical business. Prodigious cash flow continues to be faithfully returned to shareholders via dividends and share buybacks. Further, expectations remain muted as shares trade for less than 10X FY24 earnings.”
6. Diageo plc (NYSE:DEO)
Number of Hedge Fund Holders: 30
Prevatt Capital’s Stake: $23,054,700
Diageo plc (NYSE:DEO) produces, markets, and sells alcoholic beverages. It is placed sixth on our list of top stock picks of Prevatt Capital. Hedge funds are bullish on Diageo plc. (NYSE:DEO) as the firm has significant market presence and consumer loyalty due to a lot of strong brands, like Johnnie Walker, Guinness, Smirnoff, and Baileys. The firm is also well-positioned to benefit from the trend towards premiumization in the alcohol industry. Diageo plc (NYSE:DEO) is a typical Tepper stock, offering stable dividend payouts, a healthy return on equity, and has a high operating margin.
Despite having a high level of debt, Diageo plc (NYSE:DEO) remains a value champion. The earnings of the company are estimated to grow at nearly 5% and the revenue at more than 3% per year over the next three years. The company has a growth history to back up these numbers. In the past five years, earnings have grown 7% every year. The dividend yield of Diageo plc (NYSE:DEO) is above 3% with a stellar payout history. Compared to peers in the alcohol space, the stock is trading at a reasonable value for shrewd investors who understand the value proposition of the firm.
In its Q4 2023 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and Diageo plc (NYSE:DEO) was one of them. Here is what the fund said:
“One of the areas that hasn’t participated in the year’s rally has been consumer staples. We identified two staples stocks that meet our three margin of safety criteria (attractive business economics, sound financial condition and attractive valuation), purchasing Diageo plc (NYSE:DEO) and Kerry Group.
Diageo is a global leader in alcoholic beverages with an impressive collection of brands across spirits and beers. The company’s portfolio of over 200 brands provides diversification and allows it to meet consumer trends. A key focus for growth has been premiumization, and today, Diageo’s portfolio is now more heavily weighted toward premium segments. Shares are trading at multiyear trough multiples on fears of growth normalizing after a COVID-induced bounce and premiumization headwinds as some markets are showing consumers trading down to value alternatives. In the near term, margin expansion will likely be constrained, but the company generates meaningful free cash flow and returns it to shareholders through dividends and share repurchases. Over the past five years, Diageo generated £12 billion FCF and returned £16 billion to shareholders. Although spirits are more cyclical than other staples, the company’s growth prospects are better long term, and we believe the current situation has provide us an attractive investment opportunity.”
5. CME Group Inc. (NASDAQ:CME)
Number of Hedge Fund Holders: 60
Prevatt Capital’s Stake: $23,681,900
CME Group Inc. (NASDAQ:CME) is featured in fifth place on our list of top stock picks of Prevatt Capital. The firm owns and runs a derivatives marketplace. CME Group Inc. (NASDAQ:CME) represents nearly 8% of the total stock portfolio of Prevatt. The hedge fund first bought stakes in the firm during the last three months of 2024. No changes were made to this stake in the first three months of the new year. CME Group Inc. (NASDAQ:CME) is an industry-leading brand with consistent earnings growth, yet it has a Price-to-Earnings (PE) ratio of only 24, placing it firmly among the top value stocks in the derivatives world.
CME Group Inc. (NASDAQ:CME) is also an efficiently-run company. It has an EBITDA margin of 65% and a ROE of nearly 10%. The dividend yield of the stock is also impressive at around 2.6%. In addition to these numbers, the financial health of the stock is evidenced by positive free cash flows, positive operating income, positive net income, and exceptional revenue growth figures over the past three years. Many analysts on Wall Street expect investors to wake up to these realities, forecasting a steady rise in the stock’s price in the next twelve months. The average price target on Wall Street for the stock is $232.
In its Q1 2024 investor letter, Cooper Investors, an asset management firm, highlighted a few stocks and CME Group Inc. (NASDAQ:CME) was one of them. Here is what the fund said:
“A company that welcomes uncertainty is CME Group Inc. (NASDAQ:CME), a Stalwart in which we recently reinitiated a position, having successfully invested historically. Value latency has re-emerged with the shares materially underperforming over the last five years.
As the largest derivatives exchange globally, CME offers leading liquidity pools to risk managers across multiple asset classes including equities, interest rates, FX, energy and agricultural commodities. The management culture at CME exemplifies the pragmatic, no-nonsense Midwest attitude that we admire of Chicagoans – no coincidence that the portfolio owns five Chicago-based companies today. This was reinforced in a recent meeting with newly appointed CFO Lynne Fitzpatrick. CME know what they are and what they’re not, with a solid track record throughout market fads and blow-ups. The story of CEO Terry Duffy calling out Sam Bankman-Fried as ‘an absolute fraud’ (at the time he was lauded across the land as a visionary genius) is one recent example of their nose for risk.
We see several avenues for CME to grow earnings and cash flows today, irrespective of market volatility, as well as continuing to pay a special dividend implying a yield of ~4-5%. The business rarely changes hands as cheaply as it does today, trading at an average market multiple versus typically trading at a 30-60% premium. With this business routinely generating over 50% returns on invested capital and carrying no debt today, CME is far from an average business.”
4. British American Tobacco p.l.c. (NYSE:BTI)
Number of Hedge Fund Holders: 19
Prevatt Capital’s Stake: $24,400,000
British American Tobacco p.l.c. (NYSE:BTI) provides tobacco and nicotine products. It is placed fourth on our list of top stock picks of Prevatt Capital. Earlier this year, British American Tobacco p.l.c. (NYSE:BTI) posted earnings for the fiscal year 2023, reporting a revenue of more than $34 billion, up over 3% year-on-year on an organic basis at constant rates. The firm ticks all the boxes for a value investor. It has strong cash flow generation, a high dividend yield, a low PE Ratio, strong operating margins, and growing revenues. Analysts predict the firm to increase share buybacks this year, a confidence-boosting measure for value investors.
Two key recent developments bode well for the short-term future of the company. British American Tobacco p.l.c. (NYSE:BTI) recently announced that the number of trade representatives of the firm have increased by 10%. This will help the tobacco company increase retail presence, taking on competitors like Altria and Phillip Morris. The launch of a new single-use vapor product is also likely to contribute to the revenue and volume numbers of the firm in the second half of this year. The leadership of British American Tobacco p.l.c. (NYSE:BTI) expects balance sheets to strengthen in the coming months.
3. Allison Transmission Holdings, Inc. (NYSE:ALSN)
Number of Hedge Fund Holders: 31
Prevatt Capital’s Stake: $25,159,600
Allison Transmission Holdings, Inc. (NYSE:ALSN) makes and sells automatic transmissions for commercial and military vehicles. It comes in at third place on our list of top stock picks of Prevatt Capital. The bullish thesis around Allison Transmission Holdings, Inc. (NYSE:ALSN) centers on the leadership of the firm in the market of commercial vehicle transmission, a strategic focus on electrification, strong financial performance, and growth opportunities in international markets. Regulatory tailwinds can also provide a major boost to the firm in the coming years as more countries adopt EV-friendly policies.
The balance sheet of the company remains as strong as ever in a competitive market. Allison Transmission Holdings, Inc. (NYSE:ALSN) generates strong cash flows, in excess of $600 million per year, which in turn help the firm support reliable dividend payouts and share buybacks. The high operating margins of the firm, in excess of 30%, highlight the strong profitability of the stock. These margins also help paint the leadership of the company in a good light, shining on efficiencies that would otherwise be ignored. The dividend history of Allison Transmission Holdings, Inc. (NYSE:ALSN) is great reading for income-focused investors.
2. Garrett Motion Inc. (NASDAQ:GTX)
Number of Hedge Fund Holders: 35
Prevatt Capital’s Stake: $25,844,000
Garrett Motion Inc. (NASDAQ:GTX) makes and sells auto parts and equipment. It is ranked second on our list of top stock picks of Prevatt Capital. Garrett Motion Inc. (NASDAQ:GTX) has been featured in the Prevatt portfolio since the fourth quarter of 2023. Tepper increased the stake of his hedge fund in the company by nearly 4% during the first three months of 2024. This stake is now worth more than 8.7% of the total portfolio. Garrett Motion Inc. (NASDAQ:GTX) is a value offering that often slips under the radar of top inventors. However, Tepper has identified the value in the shares over the past few months.
Garrett Motion Inc. (NASDAQ:GTX) is on track to deliver positive sales and earnings growth for the next few years by becoming embedded in the production chains of top car makers. It aims to deliver on growth numbers by focusing on development of zero emission technologies, decreasing the net debt to EBITDA ratio, and authorizing share buybacks to soothe uncertain investors. As a leading manufacturer of turbochargers and other automotive components, Garrett Motion Inc. (NASDAQ:GTX) benefits from a strong market presence and technological expertise already.
In its Q1 2024 investor letter, Alluvial Capital Management, an asset management firm, highlighted a few stocks and Garrett Motion Inc. (NASDAQ:GTX) was one of them. Here is what the fund said:
“Garrett Motion Inc. (NASDAQ:GTX) delivered nice results in February. The company issued strong guidance for 2024 and best of all, indicated it would use nearly all its 2024 free cash flow to repurchase stock. The company wasted no time, buying back a whopping 10 million shares for $90 million on March 6. Garrett will continue to harvest the cash flows from its dominant turbochargers business, investing in creating products for electric vehicles and returning excess cash to shareholders. Investors seem to be waking up to the reality that while electric vehicles are a near-inevitability, it will be a long time still before internal combustion engines lose their relevance. By the time they do, Garrett Motion will have completed the transition to an electric vehicle equipment manufacturer and will have returned billions in capital to investors.”
1. CarGurus, Inc. (NASDAQ:CARG)
Number of Hedge Fund Holders: 25
Prevatt Capital’s Stake: $26,542,000
CarGurus, Inc. (NASDAQ:CARG) is the top stock pick of Prevatt Capital. The firm runs an online marketplace for new and used cars. CarGurus, Inc. (NASDAQ:CARG) posted earnings for the first quarter of 2024 in early May, reporting earnings per share of $0.32, beating market estimates by $0.04. The revenue over the period was $215 million. As new vehicles become more expensive, even as the prices of these new vehicles diminish fast in the first few years of ownership, car buyers have been flocking to used car sites to get good values on their purchases. CarGurus, Inc. (NASDAQ:CARG) is the most dominant used car website in the North American continent.
The wide moat of the firm, a Tepper favorite, can be understood by looking at the traffic of CarGurus, Inc. (NASDAQ:CARG) compared to other websites. The former draws 50% more traffic than the nearest competitor. The company reported 29.3 million monthly unique users in the fourth quarter of 2023,, up 11% year-on-year. Last year, the marketplace business of the firm ended the year with a 10% growth in revenue. All these numbers indicate that the firm, even as it remains embedded into car dealerships across the US, continues to produce value to investors as a tech offering.
While we acknowledge the potential of CarGurus, Inc. (NASDAQ:CARG) as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than Citigroup but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Michael Burry Is Selling These Stocks and Jim Cramer is Recommending These Stocks.
Disclosure: None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and insiders. Please subscribe to our free daily e-newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below. You can also look at the 13 High Growth Semiconductor Stocks That Are Profitable in 2024 and the 11 Best AI Penny Stocks to Invest in Now.
