Ray Carroll‘s Breton Hill Capital recently filed its 13F with the Securities and Exchange Commission for the reporting period of June 30. Breton Hill, a Toronto-based macro-focused hedge fund, was established by Carroll in 2011 with $100 million seeded by CalPERS, the U.S’ largest pension money manager. CalPERS withdrew its investment in 2014 along with its investments in other hedge funds, citing higher fees being charged by the industry. Prior to founding Breton Hill, Carroll was Chief Investment Officer for the Mosaic division at Diversified Global Asset Management (DGAM), a multi-billion dollar asset management firm based in Canada. Carroll also served as Managing Director, and served on the Management Committee at DGAM. The latest 13F filing reveals that Breton Hill’s total U.S. equity portfolio was worth slightly over $370 million at the end of the second quarter, and that 16% of it is comprised of stocks from the consumer discretionary space, while the top ten holdings of Breton Hill constituted 19.29% of its equity portfolio. Breton Hill made significant changes to its portfolio during the second quarter and in this article we are going to dissect its top four stock picks heading into the third quarter, which are Ford Motor Company (NYSE:F), Darden Restaurants, Inc. (NYSE:DRI), Las Vegas Sands Corp. (NYSE:LVS), and Lockheed Martin Corporation (NYSE:LMT).
But first, a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy, which identifies the best small-cap stock picks of the best hedge fund managers returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning over 139% since the launch of our small-cap strategy compared to less than 59% for the S&P 500 during that time (see the details).
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Breton Hill increased its stake in Ford Motor Company (NYSE:F) by 493% during the June quarter to over 550,000 shares valued at over $8.3 million as of June 30. After suffering a steep decline in September 2014, shares of Ford Motor Company (NYSE:F) have been mostly range-bound since then. With the demand of pickup trucks continuing to grow, the company recently launched the luxury version of its bestselling model F-150. Ford Motor Company (NYSE:F) will be declaring its second quarter results on July 28 and analysts expect the company to post EPS of $0.37, compared to the $0.33 it posted for the same quarter last year. Richard S. Pzena‘s Pzena Investment Management was bullish on the stock during the first quarter, increasing its stake by 16% to over 17.6 million shares.
Darden Restaurants, Inc. (NYSE:DRI) became the second top pick of Breton Hill by the second quarter’s close, from fifth at the end of the first quarter, though the fund increased its stake in the company only marginally, by 5,739 shares to over 106,000 shares valued at $7.54 million at the end of June. Recently, the company announced that it will be spinning off its real estate holding into an REIT. On July 9, Darden Restaurants, Inc. (NYSE:DRI) also announced that CFO Brad Richmond will be replaced by Jeffrey Davis, a Wal-Mart Stores, Inc. (NYSE:WMT) executive. Among the over 700 hedge funds that we track, Jeffrey Smith’s Starboard Value, which managed to replace the entire board of the restaurant company last October, was the largest shareholder of Darden Restaurants, Inc. (NYSE:DRI) at the end of the first quarter.
Breton Hill initiated a stake in Las Vegas Sands Corp. (NYSE:LVS) during the second quarter by purchasing 135,735 shares of the company valued at $7.136 million as of June 30. The company will be releasing its second-quarter earnings report after the closing bell on July 22 and analysts expect it to report EPS of $0.60, significantly lower than $0.83 EPS it reported for the same period last year. A lot of pessimism surrounding the stock is due to the anti-graft corruption drive of Chinese government affecting the company’s key region Macau. However, analysts continue to remain bullish on the stock with an average recommendation of ‘Overweight’. Mario Gabelli’s Gamco Investors is a prominent name that held Las Vegas Sands Corp. (NYSE:LVS) stock during the first-quarter of 2015.
Even though shares of Lockheed Martin Corporation (NYSE:LMT) suffered a continuous decline during the second quarter and ended the quarter down by 8.5%, Breton Hill increased its stake in the company by 15% to over 38,000 shares worth slightly over $7 million at the end of June. The company recently agreed to purchase the Sikorsky helicopter business from United Technologies Corporation (NYSE:UTX) for $9 billion, putting an end to weeks of speculation regarding the deal. Of the 18 prominent analysts that cover the stock, 12 have a ‘Hold’ rating on it. Jean-Marie Eveillard’s First Eagle Investment Management was one of the largest shareholders of Lockheed Martin Corporation (NYSE:LMT) as of the end of the first quarter.
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