David Einhorn, one of the most popular hedge fund managers in the US, is the founder and president of Greenlight Capital, a fund with more than $11 billion in Assets Under Management and an equity portfolio of $7.65 billion as of the end of March. Greenlight managed to return around 19.5% per year since its inception in 1996 and made its name with some big short bets, including against Lehman Brothers before its collapse in 2008. For the first three months of 2015, Greenlight’s funds inched down by 1.7% net of fees (according to its letter to investors), but some of its bets proved rather profitable such as long positions in Apple Inc. (NASDAQ:AAPL) and Sunedison Inc (NYSE:SUNE), which represented Greenlight’s first and third-largest equity positions. However, Greenlight also had a big looser in its equity portfolio, Micron Technology, Inc. (NASDAQ:MU), whose stock declined by 23% during the January-March period, and which represented its second-largest holding at the end of the first quarter.
However, in this article we will focus on Einhorn’s top small-cap picks. The reason is simple, these stocks fall under the category we are interested in under our small-cap strategy and we determined that historically, they delivered the highest monthly return across all type of stocks in Greenlight’s equity portfolio. Through backtests, we analyzed that imitating Greenlight’s small-cap ideas between 1999 and 2012, would have delivered a monthly return of 1.49%, which was more than 1.0 percentage points higher than the S&P 500 Total Return Index’s gain, and was above the average monthly return for all stocks, which amounted to 1.23%. These returns support our initial hypothesis that imitating most popular small-cap ideas among hedge funds can generate much better returns that simply focusing on their large-cap picks. In backtests, this strategy managed to outperform the S&P 500 Total Return Index by nearly one percentage point per month and for the last 2.5 years it generated returns of more than 130%, which beat the S&P 500 ETF (SPY) by over 80 percentage points (read more details here).
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With this in mind, let’s take a look at Greenlight’s largest positions represented by small-cap stocks. On the first space is Aecom (NYSE:ACM), in which the fund owns 6.56 million shares, valued at $202.10 million, which makes it the 12th-largest position in its equity portfolio. Aecom is a $5.0 billion Engineer & Construction company that provides management and technical support services. The stock is up by more than 8% since the beginning of the year and analysts see more potential over the longer-term, taking into account that $38.30 average price target. Moreover, last week, Argus boosted its price target on Aecom (NYSE:ACM)’s stock to $43.00 from $38.00 per share with ‘Buy’ rating. Greenlight is the largest shareholder of Aecom (NYSE:ACM) among the funds we track, followed by Curtis Macnguyen’s Ivory Capital with 2.88 million shares as of the end of March.
Life Time Fitness, Inc. (NYSE:LTM) represents the second small cap pick of Greenlight Capital, with the fund disclosing a $128.52 million position that contains 1.81 million shares. The stock gained more than 26% since the beginning of the year, jumping in March amid news regarding the acquisition of Life Time Fitness, Inc. (NYSE:LTM) by Leonard Green & Partners and TPG Capital, L.P., private equity firms. The value of the transaction amounts to around $4.0 billion and Life Time Shareholders will receive $72.10 per share in cash. Greenlight initiated a stake during the fourth quarter of 2014, a couple of months after the company announced plans to explore some strategic options. Overall, the news regarding the acquisition surged the popularity of Life Time Fitness, Inc. (NYSE:LTM) among investors and in the latest round of 13F filings, 28 funds disclosed holding long positions in the company, up from 20 a quarter earlier. Billionaire Israel Englander‘s Millennium Management boosted its position in the company by almost a sevenfold during the first quarter to 550,800 shares.
In Take-Two Interactive Software, Inc. (NASDAQ:TTWO), Greenlight disclosed holding 4.70 million shares, valued at $119.76 million. The $2.30 billion developer of video games represents one of the fund’s long-term holdings, which have been in the fund’s equity portfolio for more than one year. Meanwhile, the stock gained more than 57% since the beginning of 2014. For the fiscal 2015, ended March 31, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) reported revenue of $1.08 billion, down from $2.35 billion, but it also disclosed record sales for its Grand Theft Auto V, which was released by its subsidiary Rockstar Games in the fall of 2013. Since the release, the company has shipped around 52 million copies of the game across PlayStation 4, PlayStation 3, Xbox One, Xbox 360 and PC platforms. However, the company also turned to a loss of $3.48 per share, from an income of $3.20 per share a year earlier, although the decline is impacted by the deferral of net revenue and cost of goods sold impacted by a sell-in of some titles during the last two fiscal quarters. Other two shareholders of Take-Two Interactive Software, Inc. (NASDAQ:TTWO) are Robert Bishop’s Impala Asset Management and Richard Mashaal’s Rima Senvest Management, which own 3.67 million shares and 2.22 million shares respectively.
CONN’S, Inc. (NASDAQ:CONN) is another long-term small-cap pick of Mr. Einhorn. As of the end of March, Greenlight disclosed ownership of 3.56 million shares valued at $107.89 million. Conn’s stock has been losing ground throughout last year and dropped by 41% on December 9 on the back of weak financial results for the third quarter of fiscal 2015. However, since the beginning of the year, it has been recovering and is up by 98% year-to-date, although it is still 28% in red over the last 52 weeks. The specialty retailer posted a loss of $0.08 per share for the third quarter of fiscal 2015, affected by additional provisions for credit losses. Since then, CONN’S, Inc. (NASDAQ:CONN) addressed the issue with deliquency credit rates and even though it affected the sales, the company posted strong results with higher year-on-year revenue for fiscal 2015. The largest shareholder of CONN’S, Inc. (NASDAQ:CONN) among the funds we track is Christian Leone’s Luxor Capital Group, which owns 7.59 million shares as of the end of March.
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