CQS Cayman’s Top Stock Picks For This Quarter

The extreme volatility experienced by the broader market during the first three months of 2016 forced several hedge funds to  reshuffle their portfolios. While some funds used that volatility to go on a buying spree, others took it as a sign of major turmoil in the future and reduced their exposure to US equities. One of the hedge funds that seems to have chosen the latter course of action is Sir Michael Hintze‘s CQS Cayman LP. According to the latest 13F filing submitted by CQS Cayman LP with the Securities and Exchange Commission (SEC), its US equity portfolio saw a quarterly turnover of 87.88% during the first quarter and was worth almost $1 billion at the end of March, down by 31% on the quarter. The filing also revealed that while the fund reduced its stake in 30 stocks and sold its entire positions in 60 companies during the first quarter, it made comparatively less buying decisions during that period by initiating 27 new positions and raising its exposure to 22 companies. Taking into account that the fund was less bullish on US equities while entering the second quarter than it was at the beginning of 2016, in this post, we will look at its top five equity holdings and try to gauge what makes CQS Cayman still bet on them.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Zoetis Inc (NYSE:ZTS)

 – Shares held by CQS Cayman LP (as of March 31): 525,000

 – Value of Holding (as of March 31): $4.17 million

Let’s start with Zoetis Inc (NYSE:ZTS), in which CQS Cayman LP boosted its stake by 103% during the first quarter. The manufacturer of animal health medicines and vaccines has emerged as one of the most stable pharmaceutical stocks amid a slump in the sector this year with its stock currently trading down marginally (by 2%) for the year.  On May 4, Zoetis Inc (NYSE:ZTS) reported its fiscal 2016 first quarter earnings, declaring EPS of $0.48 on revenue of $1.20 billion versus analysts’ expectations of EPS of $0.41 on revenue of $1.10 billion. Following the earnings release, on May 6, analysts at Goldman Sachs downgraded the stock to a ‘Sell’ from ‘Neutral’, but upped their price target on it to $48 from $46, which is very close to the level where the stock is trading currently. Investors that initiated a stake in Zoetis Inc during the first quarter included First Eagle Investment Management, which purchased 2.8 million shares of the company.

#4 Liberty Global plc – Class A Ordinary Shares (NASDAQ:LBTYA)

 – Shares held by CQS Cayman LP (as of March 31): 525,000

 – Value of Holding (as of March 31): $4.17 million

Liberty Global plc – Class A Ordinary Shares (NASDAQ:LBTYA) was a new addition to CQS Cayman LP’s equity portfolio during the first quarter. Shares of the London-based telecommunications company have lost nearly 35% of their value since the second-half of 2015 and are currently trading down by 7.86% for 2016. According to recent reports, after EU antitrust regulators made it imminent that they won’t approve the sale of Telefonica S.A. (ADR) (NYSE:TEF)’s UK mobile unit O2 with Hutchison, the former is considering a few ‘plan Bs’, which includes merging O2 with Liberty Global plc – Class A Ordinary Shares (NASDAQ:LBTYA). For its fiscal 2016 first quarter, analysts are expecting Liberty Global plc to report EPS of $0.05 on revenue of $4.45 billion. In comparison, the company had reported a per share loss of $0.61 on revenue of $4.52 billion for the same quarter of the previous financial year.

#3 Ryanair Holdings plc (ADR) (NASDAQ:RYAAY)

 – Shares held by CQS Cayman LP (as of March 31): 525,000

 – Value of Holding (as of March 31): $4.17 million

CQS Cayman LP  brought down its holding in Ryanair Holdings plc (ADR) (NASDAQ:RYAAY) by 71% during the first quarter, relegating the company to the third spot in its equity portfolio at the end of March from the top spot it commanded at the beginning of 2016. Another fund that brought down its holding in the company during the same period was Andy Redleaf‘s Whitebox Advisors, which reduced its stake by 32% to 156,033 shares. Thought the stock of the European low-cost airline is down by around 9% so far this year, it still boasts of 14.75% and 154.05% gains in the past one and five-year periods, respectively. Despite the correction it has seen this year, analysts believe that Ryanair Holdings plc (ADR) (NASDAQ:RYAAY)’s stock will continue to rally in the coming quarters due to a number of factors  including the continuous growth of the company and its latest buyback program. According to a press release submitted by the company on May 4, its monthly traffic grew 10% year-over-year during April. The company currently sports an average rating of ‘Overweight’ and an average price target of $94.36 from the 25 leading analysts on the Street who cover it.

#2 Allergan plc Ordinary Shares (NYSE:AGN)

 – Shares held by CQS Cayman LP (as of March 31): 525,000

 – Value of Holding (as of March 31): $4.17 million

Moving on, CQS Cayman increased its stake in Allergan plc Ordinary Shares (NYSE:AGN) by 154% during the first quarter. However, the fund would seriously be questioning its thesis behind that decision in the last few weeks as Allergan plc Ordinary Shares (NYSE:AGN)’s stock has plummeted significantly during the second quarter. While the fall of the stock started in March itself when investors got concerned that the Pfizer-Allergan merge would most likely fall through, the decline intensified when the company along with Pfizer Inc. (NYSE:PFE) announced the termination of their $160 billion merger on May 6. Since mid-March, Allergan has lost nearly one-third of its market capitalization. Most analysts feel this recent drop has made Allergan’s stock extremely cheap considering the strong drug pipeline of the company and its sound balance sheet, which will be debt free after the sale of Allergan’s generics business to Teva Pharmaceuticals (NYSE:TEVA) gets completed. Stephen J. Errico‘s Locust Wood Capital Advisers inched up its stake in the company by 3% to 145,316 shares during the first quarter.

#1 Carnival Corp (NYSE:CCL)

 – Shares held by CQS Cayman LP (as of March 31): 525,000

 – Value of Holding (as of March 31): $4.17 million

With CQS Cayman LP increasing its stake in Carnival Corp (NYSE:CCL) by 90% during the first quarter, the company ended up becoming the fund’s top stock pick at the end of March. Carnival Corp (NYSE:CCL) was recently in the news after its ship Adonia made port in Havana on May 2, becoming the first U.S. cruise ship to do so in more than 50 years. However, this hasn’t had any impact on the company’s stock, which has been on a downtrend ever since the company reported better-than-expected fiscal first quarter results, on March 30. While analysts had expected EPS of $0.32 on revenue of $3.63 billion for the quarter, it reported EPS of $0.39 on revenue of $3.65 billion. Carnival Corp currently pays a quarterly dividend of $0.35 per share, which translates into an annual dividend yield of 2.84% based on its last trading price. Hedge funds that reduced their stake in the company during the first quarter included David Harding‘s Winton Capital Management, which brought its holding down by 23% to 742,562 shares.

Disclosure: None