Netflix, Inc., Amazon.com, Inc. (AMZN), Tesla Motors Inc (TSLA): Arbiter Partners’ Top Picks and Puts

Paul J. Isaac has managed Arbiter Partners Capital Management since he founded the New York-based fund in 2001. From then through 2011, the fund returned an impressive average of 21% annually. The value-oriented investor has been actively investing both for himself and others for over 35 years, in addition to serving on several non-profit boards, and boasting over 18 years of managerial experience in the securities sector.

While many of the most valuable positions in Mr. Isaac’s portfolio are devoted to call and put options on large-cap companies like Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN), and Tesla Motors Inc (NASDAQ:TSLA), we like his fund and include it in our database for the diversity of small-cap long positions he maintains in the back-end of his portfolio. Our extensive research has shown that the top 15 collective small-cap picks of funds we track, like Mr. Isaac’s, significantly outperform not only their best large-cap picks, but the market as a whole as well. In our back tests the top small-cap stocks among hedge funds beat the market by an average of nearly a percentage point per month between 1999 and 2012. We have also started forward testing the performance of these stocks at the end of August 2012. Since then, this strategy has returned 132 percentage points through March 11 of this year and beat the market by nearly 80 percentage points (see the details).

Let’s start with Isaac’s large put positions, the first two of which constitute the most-valuable positions in his equity portfolio. Those positions are in Tesla Motors Inc (NASDAQ:TSLA) and Amazon.com, Inc. (NASDAQ:AMZN)respectively, which also happen to be two of the top five stocks in which the hedge funds we track were buying protection against last quarter. Netflix, Inc. (NASDAQ:NFLX)also made that list, and Isaac also held a large number of put options on the video-streaming service as well.

As Isaac is a value investor, he must be thinking that those three stocks are extremely overpriced. Historically value stocks outperformed growth stocks like on an average return basis. Unfortunately this doesn’t mean that value stocks always outperform growth stocks like Netflix, Inc. (NASDAQ:NFLX),  Amazon.com, Inc. (NASDAQ:AMZN), and Tesla Motors Inc (NASDAQ:TSLA). Usually it is the other way around. Growth stocks outperform value stocks until the bubble pops which is why value investing isn’t a comfortable strategy for most investors. This also explains why value investing still keeps working today. Investors logically understand that value stocks outperform growth stocks but they don’t have the discipline to stick to this strategy.