Okumus Ranks 5th on Barron’s Top Hedge Funds List; Check Out Its Top Picks

Barron’s recently came out with its 2016 list of the best 100 hedge funds in the world, based on their 3-year compounded annual returns. While most leading names on Wall Street failed to make it onto this year’s list due to dismal performance in 2015, there were a few stalwarts who bucked that trend. The most prominent among them was Okumus Fund Management, run by famous value investor Ahmet Okumus, which ranked fifth on the list.

The New York-based hedge fund was up by 14.26% in 2015 and has generated a compounded annual return of 25.86% for its investors over the last three years. Since Okumus Fund Management is known for running a concentrated, top-heavy portfolio, we’ll take a look at the fund’s five largest equity holdings as of the end of the first quarter in this article, which amassed over 85% of the value of the fund’s equity portfolio.

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 Barracuda Networks Inc (NYSE:CUDA)

 – Shares Owned by Okumus Fund Management (as of March 31): 4.46 million

 – Value of Holding (as of March 31): $68.77 million

Barracuda Networks Inc (NYSE:CUDA) was a new entrant to Okumus Fund Management’s equity portfolio during the first quarter. The cyber security company lost over three-fourths of its market capitalization between June 2015 and January 2016, which appears to have prompted the move into the stock by Okumus. While the stock has managed to recover some of those losses, it is still trading down by 20.4% year-to-date and trades well beneath its IPO price of $18 per share. Barracuda Networks Inc (NYSE:CUDA) is expected to report its fiscal year 2017 first quarter results tomorrow and the consensus among analysts is for it to report EPS of $0.11 on revenue of $83.85 million. For the same quarter of the previous fiscal year, the company had reported EPS of $0.09 on revenue of $77.97 million. On June 6, analysts at JMP Securities downgraded the stock to ‘Underperform’ from ‘Market Perform’, while maintaining their $13 price target on it. Barry Rosenstein‘s JANA Partners also initiated a stake in the company during the first quarter, purchasing 100,000 shares.

#4 Valeant Pharmaceuticals Intl Inc (NYSE:VRX)

 – Shares Owned by Okumus Fund Management (as of March 31): 3.72 million

 – Value of Holding (as of March 31): $97.90 million

Amid a 74% drop in Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s stock during the first quarter, Okumus Fund Management almost doubled its stake in the company. Since the start of the second quarter, shares of the beleaguered pharmaceutical company have fallen by another 20% and are currently trading close to their 52-week low. Most analysts have given up on the stock after such severe declines and are asking investors to stay away from it until Valeant Pharmaceuticals Intl Inc (NYSE:VRX) manages to reduce its debt burden. However, on April 20, valuation expert Aswath Damodaran published a report on his blog in which he estimated the fair value of the company to be $43.66 per share and revealed that he purchased the stock at an average price of $32 per share. On June 7, Valeant reported its first quarter results, declaring EPS of $1.27 on revenue of $2.37 billion, missing analysts’ expectations of EPS of $1.37 on revenue of $2.38 billion. Bill Ackman’s Pershing Square was another hedge fund that increased its stake in the company during the first quarter, by 31% to almost 21.6 million shares.

We’ll check out Okumus Fund Management’s top three stock picks on the next page.

#3 Lifelock Inc (NYSE:LOCK)

 – Shares Owned by Okumus Fund Management (as of March 31): 9.18 million

 – Value of Holding (as of March 31): $110.78 million

Moving on, Okumus Fund Management inched up its stake in Lifelock Inc (NYSE:LOCK) during the first quarter, by 2%. Shares of the identity theft protection services provider plummeted by nearly 50% last July after the Federal Trade Commission accused the company of violating a 2010 settlement with the agency and 35 state attorneys by continuing to make deceptive claims about its identity protection services. However, the stock has recovered most of those losses since then and is now trading very close to the levels it traded at before last year’s crash. In a regulatory filing submitted in late-June, billionaire Paul Singer‘s Elliott Management disclosed that it now owns a 7.6% stake in Lifelock Inc (NYSE:LOCK). The activist hedge fund also revealed in a filing earlier in June that it has had talks with the company’s management and Board of Directors regarding “opportunities to enhance shareholder value.”

#2 The Carlyle Group LP (NASDAQ:CG)

 – Shares Owned by Okumus Fund Management (as of March 31): 7.13 million

 – Value of Holding (as of March 31): $120.45 million

The Carlyle Group LP (NASDAQ:CG) is the only company among Okumus Fund Management’s five largest equity holdings in which the fund reduced its stake during the first quarter, by 7%. Shares  of the asset management firm slumped hard in the second-half of 2015, but have been largely stable over the last four months and are currently trading up slightly in 2016. The company currently pays a quarterly dividend of $0.26 per share, which translates into a phenomenal annual dividend yield of 12.73%. For its second quarter, analysts expect The Carlyle Group LP (NASDAQ:CG) to report EPS of $0.41 on revenue of $555.9 million, which would represent stark declines from the EPS of $0.55 on revenue of $663.10 million that it had reported for the same quarter of last year. Famous short seller Jim Chanos‘ hedge fund Kynikos initiated a stake in the company during the first quarter, purchasing 276,499 shares.

#1 Web.com Group Inc (NASDAQ:WEB)

 – Shares Owned by Okumus Fund Management (as of March 31): 7.02 million

 – Value of Holding (as of March 31): $139.07 million

Web.com Group Inc (NASDAQ:WEB) continued to remain Okumus Fund Management’s top equity pick at the end of the first quarter, with the fund making no change to its stake in the company during that period. Okumus Fund Management initiated its stake in Web.com Group Inc (NASDAQ:WEB) during the third quarter of 2014, and the stock has ranked as its top stock pick nearly every quarter since. However, despite the fund’s strong performance, it’s top pick hasn’t helped much over the last two years, trading down slightly since the beginning of October 2014. Last month, Web.com Group Inc (NASDAQ:WEB) revealed a major executive shakeup following its acquisition of Yodle, which included COO Jason Teichman leaving the company. Web.com Group’s stock currently sports an average rating of ‘Overweight’ and an average price target of $25.27 from the 12 prominent analysts and research firms on Wall Street which track it. Hedge funds that sold their entire stake in the company during the first quarter included Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.

Disclosure: None