Hudson Bay Capital Management Betting Big on Mergers in Q2

While most hedge funds became cautious and reduced their exposure to equities amid the volatility in the broader market during the first quarter, Sander Gerber‘s Hudson Bay Capital Management chose the opposite path. The New York-based fund was founded by Mr. Gerber in 2005 and currently manages assets in excess of $4.5 billion. In order to generate superior returns, the fund employs multiple catalyst-driven, absolute return strategies that are intended to be uncorrelated with each other. According to Hudson Bay Capital Management’s latest 13F filing, its U.S equity portfolio was worth $2.12 billion at the end of March, 20.4% more than the $1.76 billion it was worth at the end of 2015. The filing also revealed that during the first quarter, the fund’s equity portfolio had a turnover rate of 102.25% and that its portfolio was relatively top heavy, with its top-10 holdings accounting for over 65% of the value of its portfolio. In this post, we analyze Hudson Bay Capital Management’s top-5 equity picks entering the second quarter and study their performance in 2016.

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 Office Depot Inc (NASDAQ:ODP)

 – Shares held by Hudson Bay Capital Management (as of March 31): 4.01 million

 – Value of Holding (as of March 31): $28.48 million

Let’s start with Office Depot Inc (NASDAQ:ODP), in which Hudson Bay Capital Management increased its stake by 75% during the first quarter. Shares of the office supplies company recently took a big hit after it announced that it won’t be appealing the District Court ruling which placed a preliminary injunction blocking the company’s $6.3 billion merger with Staples (NASDAQ:SPLS). At the time of the announcement, Office Depot CEO Roland Smith said that the company will host an investor call after the formal termination of the merger on May 16 to “discuss next steps in our go-forward strategy”. Office Depot Inc (NASDAQ:ODP) has missed analysts’ revenue projections for the last six quarters in a row, due to which a number of analysts feel that the company will find it increasingly hard to operate as a standalone entity going forward. Simon Davies‘ Sand Grove Capital Partners initiated a stake in Office Depot during the first quarter, purchasing 765,500 shares of the company.

#4 Time Warner Cable Inc (NYSE:TWC)

 – Shares held by Hudson Bay Capital Management (as of March 31): 164,403

 – Value of Holding (as of March 31): $33.64 million

While Hudson Bay Capital Management inched up its stake in Time Warner Cable Inc (NYSE:TWC) by 1% during the first quarter, John Armitage‘s Egerton Capital reduced its holding in the company by 6%, to 4.84 million shares during the same period. Time Warner Cable Inc (NYSE:TWC) shares have seen a gradual rise this year as the completion date for its merger with Charter Communications, Inc. (NASDAQ:CHTR) rapidly approaches (now expected to be next week). The stock is currently trading up by 15.82% year-to-date and very close to the price which Charter Communications, Inc. (NASDAQ:CHTR) is paying to acquire the company. However, this isn’t surprising considering that the merger of the companies is now imminent after the California Public Utilities Commission approved it on May 12. On April 28, Time Warner Cable reported what will be its final quarterly numbers as a standalone company. While analysts had projected it to report EPS of $1.77 on revenue of $6.14 billion for the quarter, the company declared EPS of $1.81 on revenue of $6.19 billion.

Hudson Bay’s favorite three stocks are discussed on the next page.

#3 Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT)

 – Shares held by Hudson Bay Capital Management (as of March 31): 1.00 million

 – Value of Holding (as of March 31): $79.80 million

Moving on, Hudson Bay Capital upped its stake in Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT) by a whopping 264% during the first quarter. Like the two stocks already discussed, Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT) is also a merger arbitrage play of the fund. Last month, Starwood and Marriott International Inc (NASDAQ:MAR) announced that the shareholders of both companies had officially approved their merger. The development came a week after China-based Anbang Insurance Group, which was also in the mix to acquire Starwood, withdrew its bid. On May 12, Starwood completed the sale of its timeshare business, Vistana Signature Experiences, to Interval Leisure Group, Inc. (NASDAQ:IILG). For the first quarter, Starwood reported EPS of $0.70 on revenue of $1.40 billion, beating analysts’ expectations of EPS of $0.58 on revenue of $1.34 billion.

#2 Yahoo! Inc. (NASDAQ:YHOO)

 – Shares held by Hudson Bay Capital Management (as of March 31): 2.57 million

 – Value of Holding (as of March 31): $94.44 million

Amid a 10.67% rise in Yahoo! Inc. (NASDAQ:YHOO)’s stock during the first quarter, Hudson Bay Capital Management increased its stake in the company by 237%.  Earlier this year, Yahoo! Inc. (NASDAQ:YHOO) agreed to sell its core business after continuous pressure from activist investor Jeffrey Smith of Starboard Value. In March, Starboard launched a proxy fight to overthrow the entire board of Yahoo, which lasted until April 27 when the company agreed to give four board seats to the fund, including one to Mr. Smith. According to recent reports, Yahoo is currently in the process of narrowing down the more than ten bids it has received for its core business. At the end of 2015, Starboard Value owned 7.1 million shares of Yahoo worth $236.27 million.

#1 Alibaba Group Holding Ltd (NYSE:BABA)

 – Shares held by Hudson Bay Capital Management (as of March 31): 1.71 million

 – Value of Holding (as of March 31): $134.98 million

With Hudson Bay Capital Management making a four-fold increase to its stake in Alibaba Group Holding Ltd (NYSE:BABA) during the first quarter, the company emerged as the fund’s top stock pick at the end of that period. Amid a slump in Chinese equities at the beginning of 2016, Alibaba Group Holding Ltd (NYSE:BABA)’s stock also plummeted heavily. However, it has recovered most of those losses in the last three months and is currently trading down by 4.4% year-to-date. The company reported its fourth quarter of fiscal year 2016 earnings last week, declaring EPS of $0.47 on revenue of $3.75 billion, which missed earnings estimates by $0.08 but topped revenue estimates by $$180 million. On May 12, Alibaba and SoftBank announced that they have established a joint venture, SB Cloud Corporation, which will launch cloud computing services in Japan. Another fund that increased its stake in the company significantly during the first quarter was Hari Hariharan‘s NWI Management, which lifted its holding by 167% to 708,500 shares.

Disclosure: None