Jeffrey Ubben’s Top 5 Q4 Stock Picks

ValueAct Capital, led by Jeffrey Ubben, recently submitted its latest 13F to the Securities and Exchange Commission for the reporting period of September 30. According to the filing, the value of the fund’s equity portfolio was about $17.2 billion at the end of the third quarter. ValueAct Capital has a long-term focus, and usually makes only three-to-four new investments per year. The fund often holds about 15 positions and the average holding period for each position is about three years. The latest filing shows that ValueAct Capital opened only one new position, in Towers Watson & Co (NASDAQ:TW), during the quarter, while reducing its positions in Halliburton Company (NYSE:HAL) and Adobe Systems Incorporated (NASDAQ:ADBE). In this article, we will take a look at the fund’s top stock picks for the quarter, including Microsoft Corporation (NASDAQ:MSFT), one of four companies in which the investor increased its position during the quarter.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

#5 Baker Hughes Incorporated (NYSE:BHI)

– Shares held (as of September 30): 23.25 million

– Total Value (as of September 30): $1.21 billion

Baker Hughes Incorporated (NYSE:BHI) is a supplier of oilfield services, products, technology and systems to the worldwide oil and natural gas industry. ValueAct Capital’s stake in the company remained unchanged over the quarter. Baker Hughes Incorporated (NYSE:BHI) reported a 39% year-over-year decrease in third quarter revenue to $3.8 billion. The company had a loss of $159 million, versus profit of $375 million in the same year ago period. In November of last year, Halliburton Company (NYSE:HAL) agreed to acquire Baker Hughes Incorporated (NYSE:BHI) for $34.6 billion. The deal is being reviewed by regulators, who seem very concerned about the merger. Shares of Baker Hughes have declined by 9.02% year-to-date. Another investor betting big on Baker Hughes is Matthew Halbower’s Pentwater Capital Management, which holds 8.25 million shares as of the end of September.

#4 Twenty-First Century Fox Inc (NASDAQ:FOX)

– Shares held (as of September 30): 47.33 million

– Total Value (as of September 30): $1.28 billion

ValueAct Capital was bullish on Twenty-First Century Fox Inc (NASDAQ:FOX) during the third quarter, as the investor increased its position in the media company by 2.75 million shares. Twenty-First Century Fox is also a favorite stock of Donald Yacktman’s Yacktman Asset Management, which boosted its stake in the company by 4.02 million shares to 32.33 million shares during the third quarter. A total of 32 hedge funds among those we track were holding stakes in Twenty-First Century Fox Inc (NASDAQ:FOX) at the end of the third quarter, representing a decrease from 42 funds holding the stock at the end of the second quarter. The total value of their investments fell to $4.22 billion from $5.26 billion during the period. Twenty-First Century Fox Inc (NASDAQ:FOX)’s stock is trading down by 17.21% year-to-date.

On the next page, we will analyze ValueAct Capital’s top three stocks.

#3 Halliburton Company (NYSE:HAL)

– Shares held (as of September 30): 37.15 million

– Total Value (as of September 30): $1.31 billion

ValueAct cut its position in oil field services company Halliburton Company (NYSE:HAL) by 368,700 shares during the quarter. The company swung to a loss of $54 million in the third quarter, versus income of $1.20 billion a year ago. Revenue for the quarter fell to $5.6 billion compared to $5.9 billion in the same quarter of last year. As mentioned, the proposed $34.6 billion merger deal between Halliburton Company (NYSE:HAL) and Baker Hughes is facing antitrust scrutiny in the United States. In addition, the Australian Competition & Consumer Commission has also raised concerns about the merger, which would reduce the number of suppliers in the oilfield goods and services industry in Australia. Halliburton Company (NYSE:HAL) is trading down by 3.36% year-to-date. Ken Griffin’s Citadel Investment Group was holding 5.71 million shares of the company at the end of the third quarter.

#2 Valeant Pharmaceuticals Intl Inc (NYSE:VRX)

– Shares held (as of September 30): 14.99 million

– Total Value (as of September 30): $2.67 billion

In Valeant Pharmaceuticals Intl Inc (NYSE:VRX), ValueAct Capital’s stake remained unchanged during the quarter. Recently, Valeant announced the termination of its affiliation with specialty pharmacy Philidor Rx Services, which has been accused of unethical business practices, including misleading insurance companies and altering prescriptions without physicians’ instructions. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has faced massive criticism from investors and regulators during the last few months over its affiliation with Philidor. This situation has been disastrous for the stock, which has lost 36.52% year-to-date. Stephen Mandel’s Lone Pine Capital held 7.46 million shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) as of the end of September.

1# Microsoft Corporation (NASDAQ:MSFT)

– Shares held (as of September 30): 75.27 million

– Total Value (as of September 30): $3.33 billion

ValueAct Capital slightly raised its stake in Microsoft Corporation (NASDAQ:MSFT) during the third quarter. The stock is trading up by 16.66% year-to-date, with many analysts believing that it can move up even higher. Microsoft’s performance was impressive during the third quarter, beating EPS estimates by $0.08 per share. The company reported EPS of $0.67 on revenue of $21.7 billion. Furthermore, it has increased its earnings guidance for the full fiscal year 2016 to a range of $2.49-to-$2.54 per share. Microsoft Corporation (NASDAQ:MSFT)’s improved performance attracted more hedge funds to it during the third quarter. A total of 113 funds among those we track were holding the stock in their portfolio at the end of September, compared to 107 funds at the end of the second quarter. One of them is First Eagle Investment Management, which owned 33.88 million shares of the company as of the end of September.

Disclosure: None