Over the past few days hedge funds have been filing their 13Fs for the fourth quarter of 2013, in which they disclose many of their long equity positions as of the end of December. We have found that the most popular small cap stocks among hedge funds outperformed the market by 18 percentage points even though we started measuring the returns a couple of weeks after 13Fs have been made public. It can also be productive to treat individual 13Fs as free recommendations from fund managers- not necessarily to be followed, but to be considered briefly and then researched further if they seem appealing.
In this article, I will briefly look into Sanford J. Colen’s Apex Capital’s equity portfolio. This hedge fund has been around for almost 20 years, and its long holdings are worth more than $1.5 billion, with a strong focus on services and, in a lesser measure, technology.
Although Apex’s most valuable assets are call options at Netflix, Inc. (NASDAQ:NFLX), Tesla Motors Inc (NASDAQ:TSLA) and Lululemon Athletica Inc. (NASDAQ:LULU), we will take look at the long positions. Leaving these options aside, the fund is most bullish about Netflix, Inc. (NASDAQ:NFLX), same in Q3. Even though its stakes in the internet television giant were slightly trimmed over Q4, its value increased (stock price rose by almost 10% since the start of 2014), and now adds up to more than $69.70 million. However, analysts all over are questioning the convenience of buying (or even holding) this stock, even in spite of the fact that Netflix, Inc. (NASDAQ:NFLX) is actually a good company, with above average growth prospects.
Apex also reduced its participation in its second most valuable holding by the end of Q3: the large-cap, Hertz Global Holdings, Inc. (NYSE:HTZ). From 2.60 million shares, the holding plummeted to 1.70 million shares. However, this seems to have been a right call, at least for the short term, since the stock price fell more than 12% since Jan. 1st 2014.
Nonetheless, analysts do not seem to agree with Mr. Colen (neither do they agree with the market, it seems). Most analysts recommend buying this stock, and research firms expect it to outperform its peers. On the other hand, an above average valuation and razor thin margins might dissuade a fundamental investor.
Hertz Global Holdings, Inc. (NYSE:HTZ)’s second-runner place (in Q3) was occupied by MicroStrategy Incorporated (NASDAQ:MSTR), a provider of business intelligence and mobile software with a market cap of barely $1.4 billion. Apex increased its bets on this small-cap company over Q4 by more than 47%, and now owns 423,250 Class A New Shares of the firm. Boasting an above average net margin and industry leading returns on equity and assets, while trading at about 1/3 of the industry average valuation, one can certainly understand the reason behind this move. Moreover, analysts (in average) expect MicroStrategy Incorporated (NASDAQ:MSTR) to deliver average annual EPS growth rates around 25%, compared to an industry mean projection of 17%-18%.
MGM Resorts International (NYSE:MGM), which occupied the third place in Apex’s portfolio by the end of Q3 was also displaced. Now this position is taken by Actavis plc (NYSE:ACT), a $32 billion market cap specialty pharmaceutical company. This stock was added to the fund´s portfolio in Q4, and is Apex´s largest new buy of the quarter. Its 310,000 shares are valued at $57.3 million.
Finally, on the fifth place, is eBay Inc (NASDAQ:EBAY), the internet commerce behemoth. On one of the most bullish moves in the quarter, Apex doubled its participation in the company, from 400,000 to 800,000 shares. Same as the case of MicroStrategy Incorporated (NASDAQ:MSTR), understanding why Mr. Colen is betting on eBay Inc (NASDAQ:EBAY) is not so hard. Trading at 24 times the company’s earnings, at a considerable discount to the 40.5 x P/E industry average, while boasting industry leading margins and a strong return on assets, this stock is certainly attractive for fundamental investors. Moreover, the analysts’ mean recommendation stands at a “buy” this week, and long-term growth projections surpass its industry’s average. The outlook for this company, which enjoys of great market penetration, a capital-efficient model and strong network effects, makes it a worthy investment for Mr. Colen. Is this the case for you too?
Disclosure: Javier Hasse holds no position in any stocks mentioned
Recommended Reading:
Michael Messner’s Seminole Capital Top Picks From the Latest 13F
Hedge Fund Highlights: Jeffrey Altman, Seth Klarman & Ken Griffin
Sanford J. Colen Sends Letter To Board of MicroStrategy (MSTR); Wants Investor Communication Program
