Hedge Fund Manager Charles Paquelet’s Top Tech Stock Picks

Charles Paquelet founded Skylands Capital, a Milwaukee-based long/short equity hedge fund, in 2004. Before founding Skylands, Paquelet served as a principal at Strong Capital Management, which he joined in 1989 after completing his MBA at Indiana University. Since Skylands Capital’s founding, the fund has grown by leaps and bounds as it has an equity portfolio of $743.6 million at the end of September 2015. Given Skylands has recently filed its 13F for the third quarter, let’s take a closer look at Skylands Capital’s technology picks of Hewlett-Packard Company (NYSE:HPQ), Cisco Systems, Inc. (NASDAQ:CSCO), Yahoo! Inc. (NASDAQ:YHOO), Apple Inc. (NASDAQ:AAPL), and Sensata Technologies Holding N.V. (NYSE:ST).

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Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% during the 3 years since the inception of this strategy at the end of August 2012 and outperformed the S&P 500 Index by 53 percentage points (see more details here).

#5 Yahoo! Inc. (NASDAQ:YHOO)

Shares held (as of September 30): 54,800
Total Value (as of September 30): $1.58 million
Percent of Portfolio (as of September 30): 0.21%

Although most people think of email or Yahoo.com when they hear the phrase Yahoo, Alibaba Group Holding Ltd (NYSE:BABA) and the IRS’ decision on whether Yahoo’s spin off of its Alibaba shares is tax free are the only two things that matter for Yahoo! Inc. (NASDAQ:YHOO)’s stock price. Because of Alibaba stock’s softness and the IRS’ undecided decision on the tax free spin-off, shares of Yahoo are down 32% year-to-date, although they have made a nice rally in recent weeks as Alibaba shares surged higher. Analysts are bullish, as 26 analysts have a ‘Buy’ rating, and 14 have a ‘Hold’ rating. Overall, the analysts covering Yahoo have a consensus price target of $44.24 per share, giving shares an upside of 28.97% from current levels. Because we’re bullish on Alibaba, we’re also bullish on Yahoo for the long term. If management successfully monetizes Yahoo.com and other properties, shareholders will be even happier.

#4 Cisco Systems, Inc. (NASDAQ:CSCO)

Shares held (as of September 30): 162,800
Total Value (as of September 30): $4.24 million
Percent of Portfolio (as of September 30): 0.57%

Cisco Systems, Inc. (NASDAQ:CSCO) still makes essential internet infrastructure, and the Internet of Things is a big opportunity. Although the company hasn’t figured out how to cash in on the IoT trend just yet, it could just be a matter of time. Cisco has a world class workforce and the right risk taking culture. With a forward PE of 11.83 and 2.9% dividend yield, shares look cheap. Donald Yacktman‘s Yacktman Asset Management owned 42.1 million shares at the end of June.

#3 Hewlett-Packard Company (NYSE:HPQ)

Shares held (as of September 30): 229,850
Total Value (as of September 30): $5.89 million
Percent of Portfolio (as of September 30): 0.79%

It seems Hewlett-Packard Company (NYSE:HPQ)’s turnaround plan is never ending. The PC is in secular decline and printers are no longer the growth market they were before. Hewlett-Packard Company (NYSE:HPQ) has laid off tens of thousands in recent years, and could lay off tens of thousands more. Management hopes the company’s impending split of its PC and printer business from its software and enterprise division will sharpen focus and unlock growth opportunities. At a forward PE of 7.45, Skylands and other funds feel Hewlett-Packard Company (NYSE:HPQ) is worth the risk. Other funds long the technology giant include Richard S. Pzena‘s Pzena Investment Management and Cliff Asness’ AQR Capital Management at the end of June.

#2 Sensata Technologies Holding N.V. (NYSE:ST)

Shares held (as of September 30): 152,850
Total Value (as of September 30): $6.78 million
Percent of Portfolio (as of September 30): 0.91%

Sensata Technologies Holding N.V. (NYSE:ST), a maker of sensors and controls, earned $0.72 per share on revenues of $727.36 million (up 26% year-over-year) for its third quarter, beating profit estimates by $0.01 per share but missing revenue expectations by $7.39 million. Fourth quarter guidance is for $700-740 million in revenues, $176-$188 million in adjusted EBITDA, and $0.62-$0.69 in adjusted net income per share. Given the solid earnings, and the forward PE of 14.7, shares look reasonable, although investors will need the global economy to improve for earnings to really grow. Increasing vehicle utilization rates, automated cars, and other technologies will change demand substantially in the future.

#1 Apple Inc. (NASDAQ:AAPL)

Shares held (as of September 30): 329,765
Total Value (as of September 30): $36.37 million
Percent of Portfolio (as of September 30): 4.89%

Apple Inc. (NASDAQ:AAPL) continues to hit earnings out of the park. For its fourth quarter, the technology giant earned $1.96 per share on revenues of $51.5 billion (up 22.3% year-over-year), beating estimates by $0.08 per share and $380 million, respectively. iPhone revenue increased 36% year-over-year to $32.3 billion, iPad revenues declined 20% to $4.3 billion, Services revenue rose 10% to $5.1 billion, and gross margin inched up 1.9% to 39.9%. Guidance is pretty much in-line, with management expecting gross margin of 39-40% for the first quarter.

The slowdown in China is apparently not having much of an effect on demand, as Apple iPhone revenues increased 120% year-over-year in the country. The China strength is good news for Apple shareholders, as it means demand for Apple’s premium products can hold up even if the global economy slows down. The data could go a long way in changing the market’s view that Apple is basically a one product company with unsustainable profits. Carl Icahn’s Icahn Capital Lp owned 52.76 million at the end of June.

Disclosure:none