The Latest Moves by Hedge Funds on 3 Conviction Stocks

Hedge fund vehicles have been underperforming the broader market since 2009, but their investors didn’t necessarily expect them to beat benchmarks. In fact, investors poured massive amounts of cash into hedge funds in anticipation of risk-adjusted returns, betting on their ability to control volatility. Even if you are among the individuals who doubt hedge funds’ stock picking abilities and highly-specialized knowledge, you can still monitor their moves as part of a broader stock selection or analysis process. At the end of the day, it pays to see how top money managers feel about certain stocks included in your watchlist. For that reason, this article will discuss three filings submitted with the SEC by several elite hedge funds tracked by Insider Monkey, detailing their latest trades on some of their highest-conviction stocks.

At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning 102% and beating the market by more than 53 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise (while avoiding their high fees at the same time) rather than large-cap stocks.

According to a Schedule 13G, Thomas K. Brown’s Second Curve Capital LLC currently owns 1.45 million shares of Tristate Capital Holdings Inc. (NASDAQ:TSC), accounting for 5.2% of the company’s outstanding common stock. This compares with the 1.35 million-share position disclosed through Second Curve’s 13F filing for the September quarter. The bank holding company owns three wholly-owned subsidiaries, which include Pennsylvania-chartered state bank TriState Capital Bank, investment advisor Chartwell Investment Partners, and potential broker/dealer with the SEC, Chartwell TSC Securities Corp. Tristate Capital Holdings Inc. (NASDAQ:TSC)’s shares have advanced by more than 22% since the beginning of the year, but they still look quite cheap if solely considering the company’s trailing price-to-earnings ratio of 16.10 (the ratio for the S&P 500 Index stands at 22.77). One of Tristate Capital’s subsidiaries is applying to be registered as a broker/dealer with the SEC; hence, the bank holding company could deliver even stronger financial figures should the subsidiary be registered. The company reported total revenue of $76.8 million for the nine-month period that ended September 30, up by $7.2 million from the same period of last year. Similarly, its net income increased to $16.9 million from $10.8 million year-over-year.

The hedge fund sentiment towards the stock did not change significantly during the third quarter, as the number of smart money investors in our database with stakes in the company declined to 11 from 12. Correspondingly, the overall value of those stakes shrank to $35.32 million from $38.96 million. These handful of hedge funds held 10.10% of the bank holding company’s outstanding shares on September 30. Royce & Associates, founded by Chuck Royce, cut its stake in Tristate Capital Holdings Inc. (NASDAQ:TSC) by 21% during the September quarter, to 524,953 shares.

Let’s head to the next page of this article, where we reveal Third Avenue’s move in a manufacturer of homes and Hound Partners’ position in a pharmaceutical company.

In a separate 13G filing, Martin Whitman’s Third Avenue Management reported owning 1.01 million shares of Cavco Industries Inc. (NASDAQ:CVCO), which represent 11.35% of the company’s outstanding shares. This denotes a decrease of 378,302 shares from the position revealed through the latest round of 13Fs. The designer and producer of factory-built homes has seen its shares advance by 6% year-to-date, and they are trading at a rather expensive trailing P/E ratio of 29.16. Home shipments have been on the rise in recent years, increasing by slightly more than 8% for the first eight months of the year relative to the same period of last year. Nevertheless, the low employment rate among potential home buyers and low consumer confidence are two major obstacles that have hindered Cavco Industries Inc. (NASDAQ:CVCO) from delivering exceptional growth. The consequences of the 2008 credit crisis are still impacting the manufactured housing industry, especially the reduction in available inventory financing. Nevertheless, the company’s net revenue for the six-month period that ended September 26 totaled $353.63 million, up by 27% year-over-year. As the U.S unemployment rate continues to decrease and consumer confidence levels continue to improve, the company seems to be well-positioned to deliver even stronger performance in the near future.

The number of hedge funds from our database with long positions in the company dropped to eight from 12 during the September quarter, while the value of those positions declined to $153.58 million from $175.94 million quarter-over-quarter. 25.40% of Cavco’s outstanding common stock was held by those eight firms at the end of September. Renaissance Technologies holds 167,500 shares in Cavco Industries Inc. (NASDAQ:CVCO) as of September 30.

Lastly, another Schedule 13G filing revealed that Jonathan Auerbach’s Hound Partners LLC owns a 6.98 million share-stake in Impax Laboratories Inc. (NASDAQ:IPXL), which accounts for 9.90% of the company’s outstanding shares. Hound Partners owned 7.11 million shares of Impax on September 30, according to its 13F filing for the September quarter. The shares of the specialty pharmaceutical company are up by 31% in 2015 despite being caught in the healthcare equities sell-off at the end of September. The company’s consolidated total revenue for the third quarter reached $221.1 million, up by 40% relative to the same period of last year. This increase was mainly attributable to additional product revenue as a result of the acquisition of Tower for $691.3 million, which was completed on March 9, as well as additional sales from its internally-developed RYTARY (IPX066). Pharmaceutical product RYTARY, which is designed to treat Parkinson’s disease, parkinsonism, and post-encephalitic parkinsonism, was approved by the FDA on January 7, 2015. At the end of November, the European Commission granted market authorization for IPX066 (brand name NUMIENT outside the U.S), so the company could deliver even higher revenue growth in the upcoming quarters.

The pharmaceutical company lost some of its charm among the hedge funds tracked by Insider Monkey during the third quarter, as the number of top money managers invested in the company declined to 26 from 31 during the period. Those asset managers owned 28.60% of the company’s shares on September 30, while the value of their investments dropped to $729.97 million from $1.03 billion quarter-over-quarter. Anand Parekh’s Alyeska Investment Group acquired a new stake of approximately 754,000 shares of Impax Laboratories Inc. (NASDAQ:IPXL) during the third quarter.

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