Activist investor Jonathan Auerbach “Hounded” by Losses

2015 wasn’t a good year for most hedge funds, but it was particularly excruciating for hedge funds founded by the protégés of industry legend Julian Robertson, better known as ‘Tiger Cubs’. Though some of those hedge Tiger Cub-led funds have managed to recoup some of last year’s losses this year, Jonathan Auerbach‘s Hound Partners has fallen even further in the returns table. According to Institutional Investor’s Alpha, the New York-based long/short equity hedge fund has lost money in nine of the past 12 months and four of the first five months of 2016. In May, the fund generated negative returns of 1.3% and is currently down 12.5% since the beginning of 2016. Hound Partners’ last 13F filing reveals that the fund’s equity portfolio consisted of 24 long positions, and its top five stock picks alone amassed over 50% of the value of its equity portfolio at the end of March. Since the fund was betting big on these stocks going into the second quarter, in this post, we will analyze their performance so far in 2016 and see how they have individually contributed to the fund’s performance this year.

Trough extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

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#5 Carter’s, Inc. (NYSE:CRI)

 – Shares Owned by Hound Partners (as of March 31): 2.15 million

 – Value of Holding (as of March 31): $226.72 million

Let’s begin with Carter’s, Inc. (NYSE:CRI), in which Hound Partners reduced its stake by 46% during the first quarter. After witnessing a correction during the second-half of 2015, shares of the apparel maker have again resumed their uptrend this year and are currently trading up 15.63% year-to-date. Carter’s, Inc. (NYSE:CRI) has been among the best performing apparel stocks since the end of the financial crisis, in the last five years alone it has appreciated by over 250%. Though the company’s comp sales have been weak of late, the growth of its web business has been tremendous over the past few quarters, which has more than compensated for the weak comps. Most analysts feel that despite the rally in its stock, Carter’s, Inc.’s stock is still reasonably valued at current levels. Hedge funds that initiated a stake in the company during the first quarter included Anand Desai‘s Darsana Capital Partners, which purchased 1.15 million shares of the company.

#4 Tesoro Corporation (NYSE:TSO)

 – Shares Owned by Hound Partners (as of March 31): 4.18 million

 – Value of Holding (as of March 31): $360 million

Hound Partners used the 17% drop in Tesoro Corporation (NYSE:TSO)’s stock during the first quarter to boost its holding in the company by 36%. However, that decision doesn’t seem to be playing out well for the fund as Tesoro Corporation (NYSE:TSO)’s stock has fallen further in the second quarter and currently trades down almost 25% year-to-date. Unlike Hound Partners, billionaire David E. Shaw‘s firm D.E. Shaw reduced its stake in the company during the first quarter, by 32% to 2.78 million shares. A large part of the decline that the petroleum refiner has seen this year has come on the back of rising crude oil prices, which investors fear will eat into the company’s margins. However, a lot of analysts feel that those fears are unfounded and cite the consistent growth displayed by the company’s marketing business as a reason why it can continue to perform well going forward despite the rally in crude oil prices.

#3 FleetCor Technologies, Inc. (NYSE:FLT)

– Shares Owned by Hound Partners (as of March 31): 2.54 million

– Value of Holding (as of March 31): $378.22 million

Though Hound Partners reduced its stake in FleetCor Technologies, Inc. (NYSE:FLT) by 6% during the first quarter, the company still represented the fund’s third-largest position in terms of value. The market capitalization of FleetCor Technologies, Inc. (NYSE:FLT) increased by fivefold in the period between 2011 and 2015. However, barring the correction they saw earlier this year, shares of the fuel cards and data solutions provider have remained largely range bound since the start of 2015. For its fiscal 2016 first quarter, the company reported EPS of $1.53 on revenue of 4414.30 million versus analysts’ estimate of EPS of $1.49 on revenue of $417.86 million. Following the earnings release, on May 5, analysts at Barclays reiterated their ‘Overweight’ rating on the stock, while upping their price target on it to $160 from $150, which represents potential upside of 6.5% from FleetCor Technologies, Inc.’s last trading price.

#2 Baidu Inc (ADR) (NASDAQ:BIDU)

 – Shares Owned by Hound Partners (as of March 31): 2 million

 – Value of Holding (as of March 31): $389.09 million

Despite its stock ending the first quarter flat, Chinese search giant Baidu Inc (ADR) (NASDAQ:BIDU) jumped seven spots in Hound Partners’ portfolio during that period and became its second top stock pick at the end of March owing to the 86% increase that the fund made to its stake in the company in the first quarter. Currently, Baidu Inc (ADR) (NASDAQ:BIDU)’s stock is trading down 12.78% year-to-date, with most of those losses coming in after the company reported its fiscal 2016 first quarter results on April 28. On June 7, Bitauto Hldg Ltd (ADR) (NYSE:BITA), which provides content and marketing services to automotive companies in China, revealed that it has received $300 million in investments from a consortium of investors led by Baidu. William Von Mueffling‘s Cantillon Capital Management brought down its holding in the company by 5% to 2.13 million shares during the first quarter.

#1 Spirit AeroSystems Holdings, Inc. (NYSE:SPR)

 – Shares Owned by Hound Partners (as of March 31): 11.60 million

 – Value of Holding (as of March 31): $526.35 million

Spirit AeroSystems Holdings, Inc. (NYSE:SPR) continued to remain Hound Partners’ top stock pick at the end of first quarter, even though the fund inched down its stake in the company during that period by 4%. The fund initiated a stake in the company during the first quarter of 2014, when Spirit AeroSystems Holdings, Inc. (NYSE:SPR)’s stock used to trade near the $30 levels. While shares of the aircraft parts manufacturer have lost 6.41% of their value so far this year, they are still up around 50% since the time Hound Partners initiated a stake in the company. On June 8, the company announced that its CEO, Larry Lawson, will retire in July and Tom Gentile, who serves as the COO currently, will be taking his place. Spirit AeroSystems Holdings, Inc. (NYSE:SPR)’s stock currently sports an average rating of ‘Overweight’ and an average price target $55.88 from the 19 leading analysts on the Street who cover it. Matt Sirovich and Jeremy Mindich‘s Scopia Capital reduced its stake in the company by 14% to 14.11 million shares during the first quarter.

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