Five Hedge Funds’ Picks that Show Strong Gains

If there is one topic that has been continuously discussed in business news since the beginning of this year, it has to be the underperformance of the hedge fund industry due to weak returns generated by the stock market and huge drops registered by stocks like Sunedison and Valeant. Almost every day there are articles on how the most prominent names in the industry have suffered large drawdowns  or  how some hedge funds lost a ton of money by betting on stocks that have plummeted heavily. However, at the same time, there are stocks that hedge funds collectively liked that have delivered decent returns. In this post, we will be focusing on five stocks held by a large number of hedge funds among the over 800 hedge funds covered by us that gained over 20% during the first three months of 2015. The stocks that have made it to our list had at least 40 hedge funds betting on them at the end of 2015.

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 Barrick Gold Corporation (USA) (NYSE:ABX)

– Investors with Long Positions (as of December 31): 40

– Aggregate Value of Investors’ Holdings (as of December 31): $1.15 billion

The ownership of Barrick Gold Corporation (USA) (NYSE:ABX) among funds covered by us remained constant, but the aggregate value of their holdings increased by $218 million during the fourth quarter. Billionaire Jim Simons‘ Renaissance Technologies was one of the hedge funds that increased its stake in the company by 40% to 25.71 million shares. Though most gold mining stocks have appreciated significantly this year, Barrick Gold Corporation (USA) (NYSE:ABX) has turned out to be one of the best performers even within the sector. Shares of the company ended the first quarter with gains of 84% and currently trade up over 105% year-to-date. On April 8, Credit Suisse analyst Anita Soni upgraded the stock to ‘Outperform’ from ‘Neutral’ and raised the price target to $17 from $11. In her note, Ms. Soni stated that the company’s commitment to a 15% return on invested capital  “positions ABX to effectively capture the leverage through prudent deployment of cash flow that would accrue during a period of higher gold prices”.

#4 Office Depot Inc (NASDAQ:ODP)

 – Investors with Long Positions (as of December 31): 46

– Aggregate Value of Investors’ Holdings (as of December 31): $627.20 million

Amid a 12.15% drop in Office Depot Inc (NASDAQ:ODP)’s stock during the fourth quarter, the number of investors covered by us with long positions in the company inched down by one and the aggregate value of their positions declined by 35%. Notable investors that reduced their stakes in the company significantly during the fourth quarter included Jeffrey Smith‘s Starboard Value LP, which cut its stake by 90% to 4.48 million shares. A large part of decline that Office Depot Inc (NASDAQ:ODP) saw during the quarter came in December after the Federal Trade Commission rejected its merger with  Staples, Inc. (NASDAQ:SPLS). Interestingly, the gains that the company has seen this year have also come due to this merger. On March 18, both companies issued a joint letter to their shareholders in which they reaffirmed their commitment to the transaction. Furthermore, on March 28, the New York Post reported that Staples, Inc. (NASDAQ:SPLS) is on the verge of winning its case against the FTC, which will clear the way for its merger with Office Depot Inc. All this positive news propelled Office Depot Inc’s stock to soar during the last fortnight of the first quarter and end the quarter with gains of 25.88%.

#3 Macy’s, Inc. (NYSE:M)

 – Investors with Long Positions (as of December 31): 51

– Aggregate Value of Investors’ Holdings (as of December 31): $1.16 billion

Macy’s, Inc. (NYSE:M) saw a notable decline in popularity among hedge funds during the fourth quarter with its ownership among the funds we track dropping by 16, while the aggregate value of their stakes slid by $434 million. However, there were also a number of prominent funds which initiated a stake in Macy’s, Inc. (NYSE:M) during that period, including David Einhorn‘s Greenlight Capital, which bought 6.74 million shares. In the last couple of quarters several activist investors have taken an ownership in the company, citing its real estate assets, which they believe are undervalued. In a recent letter to investors, Greenlight wrote, “it wouldn’t surprise us if a private equity firm teamed up with a REIT to buy the company and unlock the value privately.” In its fourth-quarter report, Macy’s, Inc. (NYSE:M) showed signs that it is taking the advice of these investors, which was largely the reason why its stock soared despite the dismal results and it ended the first quarter with gains of 25.78%. On March 14, analysts at Jefferies Group initiated a coverage on the stock with a ‘Hold’ rating and $45 price target.

#2 Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT)

 – Investors with Long Positions (as of December 31): 52

– Aggregate Value of Investors’ Holdings (as of December 31): $3.25 billion

Despite news about Marriott International Inc (NASDAQ:MAR)’s offer to acquire Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT) during the fourth quarter, the popularity of the latter among hedge funds didn’t increase significantly as it is usually the case when an M&A deal appears on the horizon. Though the number of investors from our database with long positions in the company increased by five during the last quarter of 2015, the total value of their holdings slid by 10%. Almost the entire 21%  gain that Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT)’s stock registered during the first quarter was seen in March, after the competition to acquire the company got heated up with the entry of a Chinese consortium of investors led by Anbang Insurance company. The group repeatedly hiked its bid to acquire Starwood last month, forcing Marriott International Inc (NASDAQ:MAR) to increase its bid and reiterate its commitment to buy the company. However, on April 1, Anbang Insurance Group suddenly dropped out and cleared the way for Marriott International Inc (NASDAQ:MAR) to acquire the company. On April 8, the respective shareholders of Marriott International and Starwood officially approved the merger between the two companies.

#1 Kinder Morgan Inc (NYSE:KMI)

 – Investors with Long Positions (as of December 31): 67

– Aggregate Value of Investors’ Holdings (as of December 31): $2.31 billion

After plummeting over 65% last year, shares of energy infrastructure company Kinder Morgan Inc (NYSE:KMI) have finally managed to regain some lost ground this year and advanced by 20.7% during the first quarter. During the fourth quarter, the ownership of the company among funds covered by us inched down by five, however, the aggregate value of their holdings in it appreciated by 26.6%. Warren Buffett‘s Berkshire Hathaway initiated a stake in the company during that period, by purchasing 26.53 million shares. Despite the rise the stock has had this year, most analysts feel that it is still undervalued at current levels. However, they also acknowledge that it can remain undervalued for a long time because Kinder Morgan Inc (NYSE:KMI) recently reduced its dividend significantly and most people who invest their money in the midstream sector look for an attractive annual dividend yield and expect dividend growth. Kinder Morgan is expected to declare its first quarter results early next week and the consensus among analysts include EPS of $0.19 on revenue of $3.76 billion. For the same quarter last year, the company reported EPS of $0.24 on revenue of $3.60 billion.

Disclosure: None