The unheralded activist hedge fund manager Rehan Jaffer can boast 30% annualized returns for his fund H Partners Management, which was established about a decade ago. After working for one of the pioneers of activist investing, Dan Loeb, and following a brief tenure at River Run Partners, Jaffer launched H Partners Management in 2005 with $15 million, which has since swelled to $1.5 billion. The market value of the fund’s public equity portfolio stood at $1.34 billion at the end of the March quarter, with the consumer discretionary sector accounting for 94% of those holdings. With regards to Jaffer’s investment prowess, Loeb put it best in Katherine Burton’s book Hedge Hunters: “He is super-hungry. He’s got a good nose. He’s very intelligent. So he’s got a great combination of having a high IQ, really strong financial analytics, a great nose for value, and great trader sense.” H Partners has a concentrated portfolio with typically five to ten investments at any one time and the average holding period for the portfolio stands at six years. We decided to take a look at how his public equity portfolio is geared towards small-cap companies, which make up the bulk of his investments. The list includes Six Flags Entertainment Corp (NYSE:SIX), Tempur Sealy International Inc (NYSE:TPX), and Boyd Gaming Corporation (NYSE:BYD).
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The top small-cap picks of Rehan Jaffer are notable to us given the fact that it’s investors like him who add great value to our Insider Monkey small-cap strategy system, as they are heavily invested in the success of their small-cap picks and have poured considerable resources into identifying undervalued or under-the-radar companies to invest in. We have found that collectively, hedge funds’ top small-cap picks provide a great investment opportunity, with our strategy having returned over 144% since it was launched at the end of August 2012, beating the market by nearly 85 percentage points (see the details).
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H Partners’ largest equity holding, Six Flags Entertainment Corp (NYSE:SIX), remained unchanged during the first quarter at 16.42 million shares valued at $794.87 million. The stake represented nearly 60% of the fund’s portfolio value. The investment firm acquired a stake in Six Flags Entertainment Corp (NYSE:SIX), the world’s largest amusement park corporation, in the form of its distressed debt as the company was moving through bankruptcy. After participating in a debt-for-equity exchange, the fund recruited the much sought after Jim Reid-Anderson as CEO in August 2010, who helped turn the company around. So far this year, Six Flags Entertainment Corp (NYSE:SIX)’s stock has appreciated by 11.03%. Among other stockholders of the company is Amy Minella‘s Cardinal Capital with 972,300 shares valued at $47.07 million.
Jaffer’s next small-cap pick, Tempur Sealy International Inc (NYSE:TPX) is also H Partners’ second-largest holding, consisting of 6.08 million shares valued at $350.77 million. The holding represented 26.14% of the fund’s portfolio value and accounts for nearly 10% of Tempur Sealy’s outstanding shares. Just last month, H Partners was able to stir up change in the ranks of Tempur Sealy International Inc (NYSE:TPX)’s upper management without a traditional proxy fight, since the fund missed the deadline to nominate directors. The shareholders of the company came through for the fund and ousted three directors including CEO Mark Sarvary, while Usman Nabi of H Partners has landed himself a seat on Tempur Sealy International Inc (NYSE:TPX)’s board. The hunt for the new CEO is on while COO Tim Yaggi has temporarily taken that post. Among the billionaires that we track, five have investments in Tempur Sealy International Inc (NYSE:TPX), with a total value of $169.18 million. Billionaire Rob Citrone is one of them as his fund Discovery Capital Management holds 1.11 million shares of the company valued at $64.05 million.
The third spot belongs to Boyd Gaming Corporation (NYSE:BYD), with Jaffer holding 4.21 million shares valued at $59.84 million, which represents 4.46% of H Partners’ portfolio value. The $1.64 billion gaming company’s stock has appreciated by a hefty 16.51% year-to-date. The gains look even more impressive when compared with the resorts & casinos industry’s average loss of over 10% during the same period. Credit Suisse upgraded Boyd Gaming Corporation (NYSE:BYD) to ‘Outperform’ from ‘Neutral’ this week and increased the price target to $18 from $17, indicating potential upside of over 22%. Paul Reeder and Edward Shapiro’s PAR Capital Management is the largest stockholder of Boyd Gaming Corporation (NYSE:BYD) within our database, owning 7.19 million shares valued at $102.21 million.
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