A portfolio formed around a smid-cap strategy offers the best of two worlds: landing comfortably between the relatively unknown nature of small-cap companies, which results in greater alpha opportunities, and the opportunity to benefit from the less volatile nature of larger mid-caps, something which is absent from a small-cap only strategy. In this regard we decided to take a closer look at how Jeffrey Altman has geared his fund, Owl Creek Asset Management‘s portfolio towards smid-cap companies with market caps of between $5 billion and $10 billion.
Jeffrey Altman graduated from Tulane University in 1988. Prior to establishing Owl Creek in June 2001, he worked as a portfolio manager at Franklin Mutual Advisers, LLC, where he focused on distressed securities. With regards to the fund’s performance during the financial crises, Owl Creek returned 40% in 2007, but lost 9% in the following year. In 2013 the fund’s bet on the Japanese economy paid off as it returned about 48% that year. Currently, the fund has about $5.82 billion worth of assets under management and the market value of its public equity portfolio stood at $1.85 billion at the end of March. The fund’s top smid-cap picks included Iron Mountain Inc (NYSE:IRM), Hertz Global Holdings Inc (NYSE:HTZ), and Service Corporation International (NYSE:SCI), which were three of its top six stock picks overall.
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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 over 142% and beating the market by 83 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.
Altman trimmed the stake of his second-largest equity holding overall, in Iron Mountain Inc (NYSE:IRM), by 2% during the fourth quarter to 4.40 million shares valued at $160.53 million. The holding represents 2.09% of the $6.74 billion provider of information management services’ outstanding common stock and 8.67% of Owl Creek’s portfolio value. Although still up slightly, by 3.29% over the past year, Iron Mountain Inc (NYSE:IRM)’s stock has slumped by over 17% year-to-date. Recently, Iron Mountain Inc (NYSE:IRM) entered into a binding Scheme Implementation Deed to acquire its Australian rival Recall Holdings for $2.6 billion. However, analysts don’t see this move resolving the company’s cash shortfall issues. Jeffries downgraded Iron Mountain Inc (NYSE:IRM) to ‘Underperform’ from ‘Hold’ and revised its price target downwards to $29 from $33. According to our database, Jonathan Jacobson‘s Highfields Capital Management is the largest stockholder of Iron Mountain Inc (NYSE:IRM), holding some 6.17 million shares valued at $224.91 million.
During the first quarter, Owl Creek acquired some 1.54 million shares of Hertz Global Holdings Inc (NYSE:HTZ) to take its total stake to 6.15 million shares valued at $133.27 million. The holding represents 7.2% of the fund’s portfolio value. Another smid-cap yet to deliver for Owl Creek, Hertz Global Holdings Inc (NYSE:HTZ)’s stock has depreciated by 16.2% so far this year. Among the billionaires that we track, nine had invested about $3.32 billion in the $9.57 billion car rental company at the end of March. Renowned activist investor Carl Icahn is one of them, as his fund Icahn Capital LP holds about 51.92 million shares of Hertz Global Holdings Inc (NYSE:HTZ) valued at $1.13 billion.
The smid-cap pick which has worked for the fund so far is Service Corporation International (NYSE:SCI), as the stock has gained more than 27% year-to-date. In contrast, the personal services industry is up by only 3.79% during the same time period. Owl Creek initiated a stake in the $5.88 billion provider of death care services and products during the second quarter of 2014. At the end of March, the holding was comprised of 3.65 million shares valued at $95.10 million. In its financial results for the first quarter, Service Corporation delivered an EPS of $0.32, which beat estimates by $0.04, however, revenues of $748.1 million came in $4.35 million lighter than expected. David Cohen and Harold Levy‘s Iridian Asset management is the largest stockholder of Service Corporation International (NYSE:SCI) among the funds that we track, owning about 10.67 million shares valued at $277.96 million.
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