Jonathan Auerbach’s Hound Partners had a very strong first quarter based on the 19 long positions in companies with a market cap of $1 billion or greater that it reported ownership of as of the end of 2014 in its latest 13F filing. The weighted average returns from those 19 positions was a hefty 12.7%, which left Hound Partners just outside the top 40 best performing funds for the first quarter, according to that metric, but in the upper 5% of performers among the more than 700 funds that we track. Among the fund’s top performing positions last quarter were Valeant Pharmaceuticals Intl Inc (NYSE:VRX), Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), Tesoro Corp. (NYSE:TSO), Spirit AeroSystems Holdings, Inc. (NYSE:SPR), and Informatica Corporation (NASDAQ:INFA).
Hound Partners is one of the more than 700 hedge funds we track at Insider Monkey in order to analyze their returns and identify their most popular small-cap picks collectively. We gather this data because we found through extensive backtesting that the 15 most popular small-caps of hedge funds had a high probability of outperforming the market and doing far better than their own large-cap picks, which underperform the market (and yet get the bulk of their capital). Since launching this small-cap strategy at the end of August 2012 it has generated returns of more than 137%, including 5.5% in the first quarter of 2015, outperforming the market by more than 82 percentage points since inception (read the latest details).
Let’s start with Valeant Pharmaceuticals Intl Inc (NYSE:VRX), which was Hound Partners’ third-largest long position heading into 2015, as it held 2.51 million shares of the Canadian pharmaceutical company. Valeant’s stock exploded during the first quarter gaining 38.79%, making it one of the biggest large-cap gainers of the year thus far. The company’s winning bid for Salix Pharmaceuticals in March, which may have also convinced activist investor Bill Ackman to take a large stake in the company shortly afterwards, was one of the key drivers of the stock during the quarter. Jeffrey Ubben and billionaires Andreas Halvorsen and Stephen Mandel all had large positions in Valeant Pharmaceuticals Intl Inc (NYSE:VRX) entering the lucrative quarter.
Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), the Chinese travel and accommodations website also proved to be a lucrative investment this past quarter for its investors, which included Hong Kong billionaire Lei Zhang, who achieved impressive first quarter returns of 22.8% from his 13 long positions, of which Ctrip.com was one of the largest. While it was only middle of the pack in terms of Hound Partners’ portfolio with its 1.53 million share position representing 1.99% of the fund’s portfolio, it did well to increase its stake in the company by 58% during the fourth quarter. Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) enjoyed its trip up the valuation charts, as its stock rose by 28.84% last quarter. John Thaler’s JAT Capital Management also had a large position in Ctrip.com, the largest of any fund in our database.
A stake of 3.06 million shares in Tesoro Corp. (NYSE:TSO) was Hound’s sixth-largest entering 2015 and was a very valuable position given the stock’s gains of 23.36% during the first quarter. The stock’s rise of nearly 75% over the past calendar year is especially impressive given it’s a part of the battered energy sector, though its petroluem refining business is actually improved by the decrease in oil prices, improving margins. The quantitative analysis-based fund D E Shaw was the largest investor in Tesoro Corp. (NYSE:TSO) among the funds in our database, and had increased its position by 9% during the fourth quarter.
A position in Spirit AeroSystems Holdings, Inc. (NYSE:SPR) was Hound’s largest long position and helped it achieve its strong performance during the past quarter, as its value rose by 21.31%. The position of had been increased by 14% during the fourth quarter to 9.43 million shares, and accounted for 11.59% of the fund’s portfolio value. Spirit AeroSystems Holdings, Inc. (NYSE:SPR) was a top pick or top new pick of several funds heading into 2015, includingNoah Levy and Eugene Dozortsev’s Newtyn Management, Matt Sirovich and Jeremy Mindich’s Scopia Capital, and Anand Desai’s Darsana Capital Partners.
Hound Partner’s new 2.69 million share position in Informatica Corporation (NASDAQ:INFA) during the fourth quarter paid immediate dividends, as the stock rose by an even 15% during the following quarter. It was reported that Paul Singer of Elliott Management had taken an activist position in the company earlier this year and would push for a sale, which eventually occurred just days ago as the company was bought by Permira Advisers LLC and the Canada Pension Plan Investment Board and taken private. Shares have spiked another 9% in April upon the announcement of that deal, which will pay shareholders $48.75 per share, a 25% increase from the start of the year, when Informatica Corporation (NASDAQ:INFA) was trading at $38.14.
Disclosure: None
