This Billion Dollar British Hedge Fund’s Eclectic Mix of Top Stock Picks

Crispin Odey founded long-based hedge fund Odey Asset Management in 1991. After having gone through its fair shares of up-and-downs over the years, the fund has grown to have an equity portfolio of $1.26 billion as of September 30, on the back of good stock selection and solid risk management. Given Odey Asset Management’s solid track record and its extensive research abilities, let’s take a closer look at the fund’s top picks heading into this quarter, which were D.R. Horton, Inc. (NYSE:DHI), Amazon.com, Inc. (NASDAQ:AMZN), Goldman Sachs Group Inc (NYSE:GS), Deutsche Bank AG (USA) (NYSE:DB), and American Airlines Group Inc (NASDAQ:AAL).

Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 38 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).

#5 American Airlines Group Inc (NASDAQ:AAL)

 – Shares held (as of September 30): 1.54 million
– Total Value (as of September 30): $59.88 million

Odey raised its position in American Airlines Group Inc (NASDAQ:AAL) by 43% in the third quarter. American Airlines recently reported record earnings on the back of low fuel prices. Given OPEC’s December 4 decision to increase its production quota to 31.5 million bpd from the previous 30 million, many investors believe crude will stay lower for longer, meaning American Airlines’ income will be healthy for the foreseeable future. American Airline’s healthy profits should translate into big share buybacks that will shrink the float. American Airlines shares trade at 7.5-times forward earnings estimates.

#4 Deutsche Bank AG (USA) (NYSE:DB)

 – Shares held (as of September 30): 2.58 million
– Total Value (as of September 30): $69.53 million

Odey was buying the dip in Deutsche Bank AG (USA) (NYSE:DB), as the fund hiked its position in the German investment bank by 48% during the July 1-to-September 30 period. Deutsche Bank shares are down by 13.7% year-to-date because of a stagnant European economy and large third-quarter write-offs. In response, new co-CEO John Cryan has suspended the dividend for two years and plans to cut the company’s workforce by 35,000. The customary extravagant bonuses for top executives may also be a thing of the past. Bulls hope Deutsche Bank’s restructuring will increase the company’s return on capital and stock price. Shares trade at 8.5-times forward earnings estimates.

#3 Goldman Sachs Group Inc (NYSE:GS)

 – Shares held (as of September 30): 449,174
– Total Value (as of September 30): $78.05 million

Next up on the list is Goldman Sachs Group Inc (NYSE:GS). Odey trimmed its Goldman Sachs position by 52%, but still had 449,174 shares at the end of September, good for 6.18% of the funds’ equity portfolio. Although other less illustrious banks may be due for long secular declines as various fintech startups perform select banking functions better, Goldman Sachs’ position as the leading investment bank is still secure. Because Goldman has the best and brightest, Fortune 500 and fast growing medium-sized companies will always want to do business with it, no matter what others offer. Goldman isn’t standing still in the technology front either, with the company recently announcing that it’s created its own cryptocurrency to facilitate the settlement of bonds, stocks, and other assets. If Goldman can harness blockchain’s potential, Goldman can be a tech company and the world’s leading investment bank. Goldman shares trade at a reasonable 9.7 forward P/E and pay out a dividend with a yield of 1.4%.

#2 Amazon.com, Inc. (NASDAQ:AMZN)

 – Shares held (as of September 30): 197,900
– Total Value (as of September 30): $101.3 million

As a serial innovator, Amazon.com, Inc. (NASDAQ:AMZN) has certainly been the reason for secular declines in disparate industries. Because of Amazon’s efforts, more people are reading e-books than ever before. Because of Amazon’s competitive prices and almost unlimited selection, goliaths such as Wal-Mart Stores, Inc. (NYSE:WMT) are having to jump head-first into e-commerce in order to please their investors. Given Amazon’s fast growing cloud infrastructure-as-a-service division, giants such as International Business Machines Corp. (NYSE:IBM) are struggling to grow their top lines. Given CEO Jeff Bezos’ long term thinking, more industries will likely experience similar levels of disruption as Amazon marches forward on its mission to become the ‘everything’ store. Shares of Amazon are up by 115% year-to-date.

#1 D.R. Horton, Inc. (NYSE:DHI)

 – Shares held (as of September 30): 3.56 million
– Total Value (as of September 30): $104.4 million

Given the strong U.S economy and optimistic sentiment across the home building industry, it’s not surprising that D.R. Horton, Inc. (NYSE:DHI) is Odey’s largest equity position. D. R. Horton reported strong fourth-quarter earnings, with EPS of $0.64 on revenue of $3.09 billion, exceeding analyst estimates by $0.02 per share and $50 million, respectively. Net sales orders jumped by 19% year-over-year to 8,477 homes while the company’s backlog increased by 8% to 10,663 homes. D. R. Horton’s growth won’t end anytime soon, as analysts expect the company to grow its EPS by an average of 17.96% per year for the next five years.

Disclosure:None