Gates Capital Loves Material Stocks, Especially These Five

Well-known event-driven hedge fund Gates Capital Management recently disclosed its long US equity portfolio worth $2.95 billion at the end of June via a 13F filing submitted with SEC. The New York-based fund was founded in 1996 by Jeffrey Gates, who holds an MBA from the Wharton School of the University of Pennsylvania and prior to starting Gates Capital served as a Director at Schroder & Co. According to the fund’s latest filing, its equity portfolio had a quarterly turnover of 25.93% during the second quarter and was considerably top-heavy at the end of that period, with its  top -10 equity holdings alone amassing almost 72% of the value of its portfolio. The filing also revealed that the fund had a significant exposure towards the materials sector, stocks from which accounted for 21% of its equity portfolio’s value at the end of June. In this post, we will take a look at Gates Capital Management’s top-five stocks picks from the materials sector and will discuss how those stocks have performed this year.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see the details here).

#5 Olin Corporation (NYSE:OLN)

– Shares Owned by Gates Capital Management (as of June 30): 2.77 Million

– Value of The Holding (as of June  30): $68.91 Million

Let’s start with Olin Corporation (NYSE:OLN), in which Gates Capital Management reduced its stake by 21% during the second quarter. Shares of the chemical manufacturer and distributor are trading up by 6.7% for 2016 currently, despite witnessing a significant decline since July 22, when the company lowered its second quarter and full-year guidance. For its second quarter, the company reported EPS of $0.24 on revenue of $1.36 billion versus analysts’ expectation of EPS of $0.31 on revenue of $1.47 billion. Olin Corporation (NYSE:OLN) currently pays a quarterly dividend of $0.20 per share, which translates into a forward yield of 4.25%. During the second quarter, the number of hedge funds covered by us that were long Olin Corporation increased by three to 28 and the aggregate value of their holdings in the company jumped by 128% to $1.29 billion.

#4 Flotek Industries Inc (NYSE:FTK)

– Shares Owned by Gates Capital Management (as of June 30): 6.03 Million

– Value of The Holding (as of June  30): $79.64 Million

Flotek Industries Inc (NYSE:FTK) was another materials stock in which Gates Capital Management lowered its stake during the second quarter, by 26%. Flotek Industries Inc (NYSE:FTK)’s stock has appreciated by 15% so far in 2016, but is still down more than 60% from the high it made in mid-2014. For its fiscal 2016 third quarter, analysts are expecting the company to report a loss of $0.02 per share on revenue of $78.1 million. For the same quarter of the previous year, Flotek Industries reported EPS of $0.04 on revenue of $87.94 million. The ownership of the company among hedge funds covered by us remained unchanged at 11 during the second quarter, but the aggregate value of their holdings grew by 24.7% to $1.28 billion.