Thomas Bancroft’s Makaira Partners is an employee-owned hedge fund which primarily invests in value stocks. The fund invests in various equities across the globe, while the firm’s public equity portfolio was valued at $575.08 million as of March 31. The fund’s activities during the quarter included one new purchase and increasing its ownership position in three other stocks, while its investment portfolio showed that it invested mainly in consumer discretionary stocks, which accounted for 33% of its portfolio. Our experts picked some of its small-cap stocks to study, namely Wesco Aircraft Holdings Inc (NYSE:WAIR), Covanta Holding Corporation (NYSE:CVA), and Valmont Industries, Inc. (NYSE:VMI), which also rank as some of the fund’s top overall picks.
First a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy, which identifies the best small-cap stock picks of the best hedge fund managers returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 142% since the launch of our small-cap strategy compared to less than 60% for the S&P 500 (see the details).
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At the end of the first quarter, Makaira Partners held 7.32 million shares of Wesco Aircraft Holdings Inc (NYSE:WAIR) valued at $112.18 million. The company posted disappointing first quarter results, as pre-production issues with a certain commercial jet manufacturer came back to haunt its organic sales target. Despite the disappointments, gross margins remained flat with improvements in working capital allowing the company to meet its debt obligations. Sales for the quarter were up by 18% compared to last year, attributed to the acquisition of Haas. Organic sales were however, down by 3%. Wesco Aircraft Holdings Inc (NYSE:WAIR) President and CEO, Dave Castagnola believes the company has not done enough on the integration of Haas, something they plan to improve on going forward. The CEO has also affirmed the company’s commitment to coming up with strategies that can guarantee repeatable and sustainable improvement in the generation of shareholder value. Michael Dell’s MSD Capital owns 5.42 million shares of Wesco valued at $83.01 million.
Makaira Partners owned 3.01 million shares of Covanta Holding Corp (NYSE:CVA) valued at $67.49 million. The company has reiterated its commitment to eliminating environmental pollution from firms generating energy from waste materials. The company’s breakthrough technology has already been accredited for significantly reducing nitrogen oxide emissions in facilities across North America. Emissions at the Vancouver Waste-to-Energy facility are down by 53% thanks to Covanta’s emission control system. The facility used to produce 0.8% nitrogen emissions prior to the installation of the new system. The emissions have since dropped to 0.4%. Covanta’s trademark technology is currently being used in 44 facilities across the globe, as the company affirms its commitment to reduce nitrogen oxide emissions to low levels across North America. John A. Levin’s Levin Capital Strategies holds 9.13 million shares of Covanta Holding Corp (NYSE:CVA) worth $204.50 million.
The third of Makaira Partners’ small-cap picks that we are going to look into is Valmont Industries, Inc. (NYSE:VMI), in which the fund holds 200,000 shares worth $24.57 million. A look at the stock’s performance shows that its value has fallen by a little over 1% over the past six months. The irrigation sector continues to perform better than expected amidst ongoing weaknesses in the market. Weak agriculture commodity prices continue to be a niggling concern that has affected the company’s revenues in North America. Weak global commodity prices are also taking a toll on the company’s irrigation business. However, the engineered infrastructure segment continues to offset weaknesses in this segment, aided by a string of acquisitions. A strengthened U.S dollar could pose further headwinds, especially on the earnings front going forward. The company is however remaining bullish on its prospects within the Coating segment, as volume and profitability levels in North America remain solid despite a decline in internal demand. Chuck Royce of Royce & Associates holds 1.77 million Valmont Industries, Inc. (NYSE:VMI) shares worth $218.27 million.
Disclosure: None
