5 New Stock Ideas For Q4 From Trellus Management

Adam Usdan’s Trellus Management is one of the first of the more than 730 elite funds we track at Insider Monkey which has filed its 13F for the third quarter, disclosing its public equity portfolio held on September 30. With many of the fund’s long positions remaining unchanged over the course of the third quarter, we decided to zero in on the new positions that it opened during the period. Within the fund’s top 21 long positions were five new stock picks in companies spanning a multitude of industries. Let’s take a look at these stock ideas and see what they could offer investors going forward.

As mentioned, Trellus Management is just one of more than 700 hedge funds that we have in our database, whose equity portfolios (like the one studied in this article) we collate quarterly as part of our small-cap strategy. Even though most investors believe that tracking 13F filings is a fruitless endeavor because they are filed with a delay of a maximum of 45 days after the end of a calendar quarter (much shorter in this particular case), the results of our research proves that is not the case. To be on the safe side, we used a delay of 60 days in our backtests that involved the 13F filings of funds between 1999 and 2012 and we still managed to gain an annual alpha in the double digits. Moreover, since the official launch of our strategy in August 2012, our small-cap strategy has obtained returns of 102%, beating the S&P 500 Total Return Index by greater than 53 percentage points, or more than double the returns (see the details).

#5 HMS Holdings Corp. (NASDAQ:HMSY)

– Shares Owned by Trellus Management (as of September 30): 85,000
– Value of Trellus Management’s Shares (as of September 30): $745,000
– Percentage of Trellus Management’s Public Equity Portfolio (as of September 30): 1.09%

HMS Holdings Corp. (NASDAQ:HMSY) ranks as the fifth-most valuable new pick added to Trellus Management’s portfolio during the third quarter. After dropping down near the $8 range in the third quarter, a 60% decline from where it began the year, Trellus appears to have determined that the stock was a good buy-low candidate. The provider of Medicaid payment services did receive some good news in late August when it was awarded a Medicaid Third Party Liability Match and Recovery Services contract from the New York State Office of Medicaid Inspector General. That led shares to spike by 13%, and they’ve inched up by another 6% since then. Looking back to the second quarter, there was conflicting hedge fund action on HMS Holdings Corp. (NASDAQ:HMSY), as the funds in our database long in the stock fell by half to 11, even as the value of their aggregate holdings rose by 80% to $96.41 million. However, we put more stock in the collective wisdom of hedge funds rather than one or two very bullish hedge funds, and the collective wisdom was right to flee the stock, as shares declined heavily in the third quarter. James Flynn and Steve Cohen were among the investors to vacate the stock in the second quarter at its elevated price.

#4 Enterprise Products Partners L.P. (NYSE:EPD)

– Shares Owned by Trellus Management (as of September 30): 30,000
– Value of Trellus Management’s Shares (as of September 30): $747,000
– Percentage of Trellus Management’s Public Equity Portfolio (as of September 30): 1.10%

Enterprise Products Partners L.P. (NYSE:EPD) ranks as the fourth-most valuable new stock pick of Trellus Management. As with HMS Holdings, Trellus was able to enter this position at a deflated price, as shares of the midstream MLP had declined by about 29% from their 2014 peak through the end of the second quarter of 2015. That performance was actually much stronger than many of its industry peers, owing to the company’s strengths: a high dividend yield of over 5%, strong fee-based cash flow, and a low debt-to-EBIDTA ratio of 3.9 times. Jim Simons, John Osterweis, and James Dondero all held long positions in Enterprise Products Partners L.P. (NYSE:EPD) of over 2 million shares as of June 30.

#3 Kinder Morgan Inc. (NYSE:KMI)

– Shares Owned by Trellus Management (as of September 30): 30,000
– Value of Trellus Management’s Shares (as of September 30): $830,000
– Percentage of Trellus Management’s Public Equity Portfolio (as of September 30): 1.22%

Kinder Morgan Inc. (NYSE:KMI) is next on Trellus Management’s new stocks list. The $60 billion energy infrastructure and midstream company was actually bucking the trend of poor stock performance in the industry up until the end of April, when it began to steadily decline. Its second quarter earnings missed estimates by over 20%, coming in at $0.15, an 80% year-over-year decline. While Kinder Morgan is expected to benefit from increased demand, it’s also facing obstacles in one of its largest projects, the TransMountain pipeline expansion in Canada, which has already been delayed by nine months due to local opposition. With the Liberals under Justin Trudeau winning a majority government in the recent Federal elections in Canada, there is yet more uncertainty over the future of the project. Kinder Morgan Inc. (NYSE:KMI) also pays a robust dividend, which it recently raised, amounting to a yield of 6.14%. Kinder Morgan also has the backing of Bernard Selz, who held a position of 808,211 shares on September 30.

On the following page we’ll delve into Trellus Management’s top two new stock picks heading into the fourth quarter.

#2 PPG Industries, Inc. (NYSE:PPG)

– Shares Owned by Trellus Management (as of September 30): 10,980
– Value of Trellus Management’s Shares (as of September 30): $963,000
– Percentage of Trellus Management’s Public Equity Portfolio (as of September 30): 1.41%

PPG Industries, Inc. (NYSE:PPG) slid by over 25% during the third quarter, making it an attractive investment for Trellus Management. A prolonged swoon hit the stock following its second quarter earnings in mid-July, which delivered record earnings of $1.67 per share, but came up short on revenue estimates by $60 million, at $4.04 billion. The stock’s turnaround has been a quick and successful one thus far, as shares have rebounded by over 15% in the fourth quarter, despite another earnings report that missed on revenue expectations, even more widely this time, by $150 million, which was impacted by currency exchange headwinds. While the Industrial Coatings segment saw weakness in China, it was offset by growth in both the U.S and Europe. Billionaires Ken Griffin and Daniel Och were major investors of PPG Industries, Inc. (NYSE:PPG) as of June 30, holding 5.11 million shares and 2.93 million shares respectively.

#1 Anheuser Busch Inbev SA (ADR) (NYSE:BUD)

– Shares Owned by Trellus Management (as of September 30): 13,600
– Value of Trellus Management’s Shares (as of September 30): $1.45 Million
– Percentage of Trellus Management’s Public Equity Portfolio (as of September 30): 2.12%

Anheuser Busch Inbev SA (ADR) (NYSE:BUD) rests comfortably atop the list, and its inclusion is not a big surprise for an event-driven fund like Trellus Management, given the merger talks which broke out between Anheuser Busch and SABMiller plc (ADR) (OTCMKTS:SBMRY) late in the third quarter. The deal was finally consummated in the middle of October, though it will still face challenging antitrust concerns given the size of the merger, which would join the world’s two largest brewers and give them 30% global market share (and much higher than that in some areas, including the U.S). Shares of Anheuser Busch Inbev SA (ADR) (NYSE:BUD) have gained over 9% in the fourth quarter.

Disclosure: None