Gabalex Capital Management’s Top Stock Picks for Q2

Nigel Greig and Kenneth Cowin’s Gabalex Capital recently submitted its 13F filing with the Securities and Exchange Commission for the reporting period ending March 31, revealing a U.S equity portfolio worth $288.47 million and consisting of 22 positions. The New York-based long/short equity hedge fund was founded in 2008 by Mr. Greig, who was a Senior Managing Director in the private client services division at Bear Stearns for 12 years prior to starting the fund. Mr. Cowin meanwhile currently serves as the Chief Compliance Officer and Chief Operating Officer of the fund, having previously worked as the Chief Compliance Officer at Trilogy Capital LLC. The latest filing from Gabalex Capital’s reveals a fairly diversified U.S equity portfolio, with stocks from nearly all prominent sectors contained in it, while its top-5 picks accounted for 45% of the value of its portfolio. Since Gabalex Capital was betting big on these five stocks going into the second quarter, we are going to focus on them in this article.

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 Gilead Sciences, Inc. (NASDAQ:GILD)

 – Shares held by Gabalex Capital (as of March 31): 225,000

 – Value of Holding (as of March 31): $20.67 million

After increasing its stake in Gilead Sciences, Inc. (NASDAQ:GILD) by 50% during the final quarter of 2015, Gabalex Capital again boosted its holding by 50% during the first quarter. The stock of the biopharmaceutical giant is currently trading down by 16.14% year-to-date owing largely to the decline it suffered after the company came out with its first quarter results. While the Street had estimated Gilead to report EPS of $3.13 on revenue of $8.08 billion for the quarter, the company declared EPS of $3.03 on revenue of $7.80 billion. Investors fear that sales of the company’s Hepatitis C drugs have peaked and that there are no major products in its drug pipeline to replace them, which could lead to results weakening further in the future. However, a large number of analysts continue to remain bullish on the stock, including analysts at Robert W. Baird, who reiterated their ‘Buy’ rating and $135 price target on it on May 1. Bernard Selz‘s Selz Capital was another hedge fund that increased its stake in Gilead Sciences, Inc. (NASDAQ:GILD)’s during the first quarter, by 16% to 150,000 shares.

#4 Berkshire Hathaway Inc. (NYSE:BRK.B)

 – Shares held by Gabalex Capital (as of March 31): 150,000

 – Value of Holding (as of March 31): $21.28 million

Gabalex Capital kept its stake in Berkshire Hathaway Inc. (NYSE:BRK.B) unchanged during the first quarter, at 150,000 shares. After witnessing a slow and steady decline last year, shares of the investment giant have managed to recoup some of those losses this year, as they currently trade up by 7.33% year-to-date. On May 3, Clayton Homes, a subsidiary of Berkshire Hathaway Inc. (NYSE:BRK.B), announced that it purchased Tennessee-based Goodall Homes for an undisclosed sum. Berkshire Hathaway recently reported its first quarter results, which were in-line with analysts’ expectations. While the operating earnings of $3.74 billion that the company reported for the quarter came in well beneath the operating earnings of $4.24 billion that it had reported for the same quarter of last year, the net earnings attributable to shareholders for the quarter were up by 8.33% year-over-year to $5.59 billion. Gifford Combs‘ Dalton Investments inched up its stake in Berkshire Hathaway by 1% to 224,033 shares during the first quarter.

Gabalex Capital’s top-3 stock picks for the second quarter are revealed on page two.

#3 Schlumberger Limited. (NYSE:SLB)

 – Shares held by Gabalex Capital (as of March 31): 300,000

 – Value of Holding (as of March 31): $22.12 million

Gabalex Capital became quite bullish on Schlumberger Limited. (NYSE:SLB) during the first quarter, doubling its stake in the company during the period. The fund’s conviction in the stock was rewarded in April, when Schlumberger Limited. (NYSE:SLB)’s stock appreciated by 9%. However, the stock has taken a hit in the last few days after rating agency Moody’s lowered its credit rating on Schlumberger Limited to Aa3 from A1 on April 29. Along with the downgrade, Moody’s also lowered its rating outlook on the company to ‘negative’ from ‘stable’, suggesting that it could reduce the rating even further going forward. Though Schlumberger’s stock has fallen by nearly 10% since Moody’s lowered its rating, it is still trading up by 4.49% year-to-date. On May 9, analysts at Goldman Sachs reiterated their ‘Buy’ rating on the stock, while upping their price target on it to $94 from $82, which represents potential upside of nearly 30%. Billionaire Ken Fisher‘s Fisher Asset Management increased its holding in Schlumberger marginally during the first quarter, by 1% to 4.27 million shares.

#2 Home Depot Inc (NYSE:HD)

 – Shares held by Gabalex Capital (as of March 31): 225,000

 – Value of Holding (as of March 31): $30.02 million

Moving on, Gabalex Capital continued to hold the same number of shares in Home Depot Inc (NYSE:HD) at the end of March that it did at the end of 2015. The stock of the retailing giant has continued its multi-year bull run this year, appreciating by 2.17% so far in 2016. Since the company has consistently hiked its quarterly dividend payments over the last few years, Home Depot still sports a respectable annual dividend yield of over 2% despite the continuing appreciation of its stock. For the first quarter, analysts are expecting the company to report EPS of $1.34 on revenue of $22.23 billion, which would represent solid increases from the EPS of $1.16 on revenue of $20.89 billion that Home Depot reported for the same quarter of last year. Another fund that left its stake in the company unchanged during the first quarter was Gregory Thomas‘ Carbonado Capital, which owned 250,000 shares of Home Depot Inc (NYSE:HD) at the end of March.

#1 W W Grainger Inc (NYSE:GWW)

 – Shares held by Gabalex Capital (as of March 31): 150,000

 – Value of Holding (as of March 31): $35.02 million

W W Grainger Inc (NYSE:GWW) continued to remain Gabalex Capital’s largest equity holding at the end of March, with the fund making no changes to its stake in the company during the first quarter. Though W W Grainger Inc (NYSE:GWW)’s stock has rallied significantly this year, appreciating by 12.64%, it still trades below what it did when Gabalex Capital first initiated a stake in the company during the last quarter of 2013. According to analysts who track the stock, it could remain range-bound for a long time, as the company is facing numerous headwinds, which includes weakness in ordering trends across most of its target markets. Mehdi Mahmud‘s First Eagle Investment Management increased its stake in W W Grainger by 20% to 1.79 million shares during the first quarter.

Disclosure: None