Kenneth A. Moffet’s Hourglass Capital is a fund which is not currently in our database, but one whose top picks from its latest 13F filing we wanted to analyze and share with readers nonetheless. What we found is a big long-term commitment from the fund in airline stocks, with three of the world’s major air carriers: American Airlines Group Inc (NASDAQ:AAL), United Continental Holdings Inc (NYSE:UAL), and Delta Air Lines, Inc. (NYSE:DAL), being in the fund’s top seven long positions. That’s nearly unchanged from a year ago, when the same three stocks ranked in Hourglass’ top eight.
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Founded in 1989, Moffet heads the Houston, Texas-based fund, which merged with Moffet Capital Management in 1996. The fund has assets under management and advisory of over $800 million and an equity portfolio valued at nearly $668.0 million as of the end of March. Hourglass uses a value-oriented investment style that is based on sound fundamentals. Hourglass offers its investment services to both institutions and private clients. Prior to Hourglass, Kenneth was an Executive Director with Morgan Stanley (NYSE:MS)’s Private Wealth Management Group, also in Houston.
Hourglass’ top pick remains one of those airlines, American Airlines Group Inc (NASDAQ:AAL), and it’s the sixth straight quarter this stock has ranked as the top long position in the fund’s equity portfolio. Hourglass did decrease the position by 9% during the first quarter to 665,823 shares valued at $35.14 million. However, the holding still easily ranks as the fund’s top long position, having a value more than 50% greater than its next top pick. American Airlines Group Inc (NASDAQ:AAL) has been a big winner for Hourglass since the beginning of 2014, when the airline first ranked as the fund’s top play. Shares are up over 90% since then, though they are down over 10% this year. While earnings growth has been strong, revenue growth has been less so, underperforming the industry average last quarter. With its stock already having flown high in 2014, American Airlines did not rank on our list last year of the best airlines stocks to invest in. That hasn’t stopped it from being a popular stock among funds however, with James Dondero’s Highland Capital Management owning a particularly large position.
Homebuilder D.R. Horton, Inc. (NYSE:DHI) ranks as Hourglass Capital’s second pick, moving up from fifth despite Hourglass trimming the position by 8% during the first quarter. D.R. Horton, Inc. (NYSE:DHI)’s strong returns of 12.88% during the quarter accounted for the rise in position, leaving Hourglass’ holding in the company valued at $22.05 million through its 774,198 shares. While earnings and orders have been strong for D.R. Horton, Inc. (NYSE:DHI), there are concerns that its gross margins will continue to slide as they have done the past few quarters. Crispin Odey’s Odey Asset Management was very bullish on D.R. Horton entering 2015, owning a position of over 15.49 million shares and with exposure of just over 12% to the stock, its top pick.
Citigroup Inc (NYSE:C) is Hourglass Capital’s third pick and the only one of its top five holdings that it increased last quarter. The position now consists of 409,782 shares, up by 3% over the quarter, with a value of $21.11 million.Citigroup Inc (NYSE:C)’s dip of 4.77% during the first quarter may have prompted Hourglass to add to its position at the discounted price, with the expectation of a rebound being not far off. Indeed, that rebound was not far off at all, with Citigroup making up for those losses in the second quarter, leaving shares up slightly for the year, great news for the multiple investors who beat the market in the first quarter despite Citigroup Inc (NYSE:C) being one of their top picks. Those funds included Mangrove Partners, Kahn Brothers, and Mohnish Pabrai.
Morgan Stanley (NYSE:MS), Moffet’s former employer, ranks as the fourth-most valuable position in his equity portfolio. As with many of the fund’s other top holdings, its position in Morgan Stanley (NYSE:MS) is one it has held highly for numerous quarters. In the most recent quarter, that position was trimmed a wee bit, by 1% to 581,001 shares valued at $20.74 million. Morgan Stanley said yesterday that it could lose about $292 million from a lawsuit brought against it by Deutsche Bank AG (USA) (NYSE:DB) last April, which alleged that Morgan Stanley misrepresented mortgages which were held in a trust that was backed by Deutsche Bank subsidiary Deutsche Bank National Trust. Morgan Stanley (NYSE:MS) shares are down over 2% year-to-date, much to the chagrin of its many bullish investors, including billionaire Mario Gabelli.
As mentioned, United Continental Holdings Inc (NYSE:UAL) ranks in Hourglass Capital’s top seven, and is the second airliner to rank in its top five. The fund’s holding in United Continental was also trimmed during the quarter, to 307,008 shares, 3% less than the previous quarter, with the value of the holding also decreasing to $20.65 million. United Continental Holdings Inc (NYSE:UAL) ranked third among airlines for how many billionaire investors it had in our database, with airlines being a popular sector among those wealthy investors, including billionaire Ken Griffin. Like American Airlines, United Continental has enjoyed an impressive run since the start of 2014, gaining more than 61%, yet has also fallen this year as the industry faces stronger headwinds than it did in 2014.
Professional investors like Moffet spend considerable time and money conducting due diligence on each company they invest in, which makes them the perfect investors to emulate. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performances as a whole have been poor in recent years. A portfolio of the 15 most popular small-cap stocks among funds outperformed the S&P 500 Total Return Index by 95 basis points per month between 1999 and 2012 in backtesting. The exceptional results of this strategy got even better in forward testing after the strategy went live at the end of August 2012. A portfolio consisting of the 15 most popular small-cap stock picks among the funds we track has returned more than 137% and beaten the market by more than 82 percentage points since then, and by 4.6 percentage points in the first quarter of this year (see the details).
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