By definition, hedge funds are often thought of as being a tool for high net-worth investors only, but there are ways for their retail-focused peers to get in on the action. At Insider Monkey, we track 450 of the world’s most elite hedge fund managers and our research has shown that over time, their best picks have had a tendency to historically outperform. For more than a decade in our back tests, our strategy beat the market by 18 percentage points a year, and since we’ve started sharing these picks with the public, it has outpaced the S&P 500 by more than 20 percentage points (learn how to use this strategy yourself).
Let’s take a look at one fund in particular: Richard Perry’s Perry Capital. Here are his top five equity positions.
Topping the list is American International Group Inc (NYSE:AIG). After adding the stock to his portfolio last quarter, Perry has upped his position in American International Group Inc (NYSE:AIG) by another 42%. Shares of the leaner, meaner post-bailout insurer have fallen below the S&P 500 and Dow in the past week, but still have enough momentum to test the $40 mark, possibly as soon as before the end of the quarter. The company suffered a black eye on the heels of its government bailout, but seems to have returned to its core business, and it is still a buy with a P/E ratio of less than 10. Aggregately speaking, hedge funds were extremely optimistic on American International Group Inc (NYSE:AIG) last quarter (see the details here).
Sitting at No. 2 is Lamar Advertising Co (NASDAQ:LAMR). The billboard and transit advertising-maker has consistently improved its bottom line by cutting cost of goods sold/revenue to 35% from 36% in 2011. Unfortunately, the stock is priced relatively expensive to the rest of this sector, and it has been finding strong resistance above $48 per share. Perry increased his Lamar Advertising Co (NASDAQ:LAMR) position by 60% last quarter, and with the exception of Luxor Capital Group, Perry is the only other fund that has behaved bullishly.
Third on the list of Perry’s top five is Nexen Inc. (USA) (NYSE:NXY). China’s CNOOC Limited (ADR) (NYSE:CEO) recently acquired the Canadian oil and gas company after posting a $5.9 million loss for the fourth quarter of 2012, versus a profit of $42 million a year ago. While the Canadian government was somewhat apprehensive about allowing a Chinese state-owned company having a stake in the Canadian oil sands, it was the US that put up the biggest fight about having the Chinese operating on our northern border on “security concerns.” When it was all said and done, the terms of the deal gave stockholders $27.50 in cash per share.
Who’s the best of the rest?
At No. 4 is NRG Energy Inc (NYSE:NRG); Perry Capital has the largest position in this electric company of the funds we track, worth a little over 6.5% of its total 13F portfolio. Perry increased his holdings by 20% this past quarter, and the stock’s performance over the past several days has been very impressive, particularly as it pushes through resistance at the $25.30 mark. Equally as important, the company has begun its operation of its Borrego solar-generating station in California. Energy generated from this facility will be sold to San Diego Gas & Electric for the next 25 years, and the company should continue to see its bottom line improve as sales increase relative to cost.
Finally, at No. 5, is Express Scripts Holding Company (NASDAQ:ESRX), which recently reported very strong earnings of $27.4 billion, beating analyst’s estimates and coming in at more than double 2011 totals. Even though the stock is expensive relative to the rest of the sector, analysts are still recommending a buy with an average target price near $64 a share.
In short, Perry Capital enjoys the benefit of being diversified among services, technology and financial stocks, and this “fab five” illustrates the variation among sectors within the fund. Perry has made sizable increases to each member of his top five, and his strategy is one worth paying attention to. The fund has outperformed the rest of the market every year but one since its inception in 1998.
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