Michael Lowenstein‘s Kensico Capital recently submitted its 13F for the reporting period of March 31, 2015. According to the SEC filing, the firm had a public equity portfolio value of $5.06 billion, an increase from $4.60 billion at the end of 2014, while the fund has $7.43 billion in assets under management. The employee-owned hedge fund uses a strategy that focuses on a value-driven investment approach, choosing stocks and investing heavily on its top picks. In the quarter, the company’s top three picks constituted 37.96% of its portfolio value while its top ten constituted 76.57%. Kensico Capital was co-founded by Thomas Coleman and Michael Lowenstein in 2000 and has seen significant growth since. After considering the activities and investment trends of the company, we realized that the firm, even with its enormous growth still focuses heavily on small-cap stocks to fully leverage its investment potential. As a result, we’ll take a look at its top three small-cap picks for the second quarter, which are WebMD Health Corp. (NASDAQ:WBMD), Echostar Corporation (NASDAQ:SATS), and National General Holdings Corp (NASDAQ:NGHC).
Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 144% over the ensuing 32 months, outperforming the S&P 500 Index by nearly 85 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.
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The top small-cap pick of Kensico Capital is WebMD Health Corp. (NASDAQ:WBMD). The fund’s SEC filing revealed that it held a total of 4.69 million shares of the company, with a value of $205.64 million, the position unchanged from the previous reporting period. The online health information company sports a profit margin of 7.76% and a return-on-assets of 5.11%. WebMD Health Corp. (NASDAQ:WBMD) has grown fast over the years and has become a target of many investors. Its first quarter 2015 results showed that the company realized $0.22 in earnings per share, the same as analysts’ consensus estimate. One thing that has drawn many investors to the company is its profitability. In the quarter, its profit jumped 60% as a result of a double-digit increase in traffic, thus increased income from advertisements. WebMD Health Corp. (NASDAQ:WBMD) expects between $8.5 million and $9.5 million in net income for the current quarter compared to Thomson Reuters’ estimate of $8.49 million for the same quarter. The company has also forged working relationships with companies like Microsoft Corporation (NASDAQ:MSFT) and News Corp (NASDAQ:NWSA) to make access to health information easier. Other hedge funds that had stakes in the stock include Healthcor Management LP and Michael Doheny‘s Freshford Capital Management, which had 1.30 million shares, a 14% increase during the first quarter.
