Tech, Energy Stocks Lead Winton Capital Management’s Portfolio Into 2016

Winton Capital Management is a London-based quantitative hedge fund founded by billionaire David Harding in 1997. Having started its journey with $1.6 million in assets, the fund currently boasts over $30 billion in assets under advisement (AUA). The fund uses statistical analysis and mathematical modelling of historical data to identify profitable investment opportunities and employs scientists from diverse backgrounds to continuously improve its trading models. Winton Capital Management recently submitted its 13F filing with the Securities and Exchange Commission (SEC) for the reporting period ending December 31, revealing a U.S public equity portfolio worth $11.25 billion. According to the filing, the fund’s portfolio had a 38.78% turnover rate during the fourth quarter and its top-ten equity holdings at the end of December accounted for 12.50% of the value of its equity portfolio. In this article we will be analyzing Winton Capital Management’s top five stock picks going into 2016.

We track hedge funds and prominent investors 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 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas (see the details here).

#5 Valero Energy Corporation (NYSE:VLO)

– Shares Owned by Winton Capital Management (as of December 31): 1.93 million

– Value of Holding (as of December 31): $136.88 million

The massive slump in crude oil prices in 2015 helped refiners like Valero Energy Corporation (NYSE:VLO) boost their earnings significantly. Shares of the company ended 2015 up by around 40%, with almost all of those gains coming in the fourth quarter alone. This surge in its stock price coupled with the 40% boost to Winton Capital Management’s position in the stock pushed Valero Energy Corporation up by 20 spots in the fund’s equity portfolio quarter-over-quarter. Valero Energy Corporation (NYSE:VLO) recently reported its fourth quarter results and even though the numbers were better than expected its stock has tumbled heavily over the last few days. While announcing its results, Valero Energy Corporation also hiked its quarterly dividend by 20% to $0.60 per share, which at its current stock price represents an attractive annual dividend yield of 4.38%. Ken Fisher‘s Fisher Asset Management owned over 175,000 shares of Valero Energy at the end of 2015.

#4 eBay Inc (NASDAQ:EBAY)

– Shares Owned by Winton Capital Management (as of December 31): 5.34 million

– Value of Holding (as of December 31): $146.8 million

Amid a 12.4% rise in eBay Inc (NASDAQ:EBAY)’s stock during the fourth quarter, Winton Capital Management increased its stake in the company by 377%. Shares of eBay Inc (NASDAQ:EBAY) were more or less resilient to the slump in the broader market in early-January, but have slumped hard since the company reported its fourth quarter numbers on January 27 and now trade down by 20% year-to-date. While analysts were expecting the company to report EPS of $0.50 on revenue of $2.31 billion, eBay reported EPS of $0.50 on revenue of $2.30 billion. Following the earnings release, several analysts lowered their price targets on eBay’s stock. Among them were analysts at RBC Capital, who on February 1 reiterated their ‘Hold’ rating, but lowered their price target on the stock to $24 from $27. Jacob Rothschild’s RIT Capital Partners reduced its stake in eBay by 27% to 1.26 million shares during the fourth quarter.

#3 Archer Daniels Midland Company (NYSE:ADM)

– Shares Owned by Winton Capital Management (as of December 31): 4.42 million

– Value of Holding (as of December 31): $162.2 million

The fall in commodity prices along with a strong U.S dollar took a heavy toll on Archer Daniels Midland Company (NYSE:ADM)’s stock in 2015. A large part of that decline came in the last quarter of the year, after the company reported dismal third quarter financial results. Nevertheless, Winton Capital Management displayed its conviction in the stock by buffing its position in it by 38% during the period. The company recently reported its fourth quarter numbers and even though the numbers were again disappointing, its stock didn’t suffer the same fate as it did in the previous quarter. Market experts believe that this might be because the stock is already trading at a fairly cheap valuation, with a forward price-to-earnings multiple of 11 and price-to-book multiple of only 1.12. Given the low valuation, coupled with an annual dividend yield of over 3.57%, the stock appears to be insulated enough to prevent falling much farther. Billionaire Mario Gabelli‘s GAMCO Investors reduced its stake in Archer Daniels Midland Company (NYSE:ADM) by 3% to 825,918 shares during the fourth quarter.

#2 Corning Incorporated (NYSE:GLW)

– Shares Owned by Winton Capital Management (as of December 31): 9.18 million

– Value of Holding (as of December 31): $167.74 million

Corning Incorporated (NYSE:GLW) is the only company among Winton Capital Management’s top-nine equity holdings in which the fund reduced its stake during the fourth quarter, albeit by only 3%. Shares of the glass and ceramics manufacturer slumped heavily between February and August of last year, but thanks largely to the $20 billion long-term capital allocation plan that the company announced during the fourth quarter, they are now in a recovery mode. On January 26, Corning Incorporated (NYSE:GLW) reported EPS of $0.34 on revenue of $2.40 billion for the fourth quarter, beating analysts’ expectations of EPS of $0.32 on revenue of $2.33 billion. Corning also revealed that it generated free cash flow of $628 million during the fourth quarter and spent $1.3 billion to repurchase shares during the period. Furthermore, it raised its quarterly dividend by 12.5% to $0.135 per share, which at current market price represents an annual dividend yield of nearly 3%. Richard S. Pzena‘s Pzena Investment Management increased its stake in Corning Incorporated by 12,185 shares to 4.80 million shares during the October-December period.

#1 International Business Machines Corp. (NYSE:IBM)

– Shares Owned by Winton Capital Management (as of December 31): 1.4 million

– Value of Holding (as of December 31): $194.8 million

Despite its stock declining by 3.4% during the quarter, International Business Machines Corp. (NYSE:IBM) jumped 11 spots quarter-over-quarter to become Winton Capital Management’s top stock pick at the end of fourth quarter, as the fund nearly doubled its stake in the company during that period. IBM recently reported its fourth quarter results and yet again disappointed investors by reporting 16.7% and 8.5% year-over-year declines in earnings and revenue, respectively. Due to the consistent decline in its revenue, shares of International Business Machines Corp. (NYSE:IBM) have been on a gradual decline since 2013 and now trade at a forward price-to-earnings multiple of 8.77. However, despite the low valuation and the growth that its cloud business has shown, in addition to its lead in the still-evolving Internet of Things (IoT) space, most analysts are still not optimistic about the company’s future. On January 22, analysts at Bank of America reiterated their ‘Neutral’ rating on the stock, while lowering their price target on it to $135 from $160. With ownership of over 81.00 million shares of the company, Warren Buffett‘s Berkshire Hathaway was the largest shareholder of International Business Machines Corp. among the funds tracked by us at the end of third quarter.

Disclosure: None