Prominent value investor and author Whitney Tilson, the founder and managing partner of Kase Management (formerly T2 Partners) has filed his latest 13F with the SEC, disclosing his firm’s equity holdings as of March 31. There was limited turnover in his portfolio during the first quarter, with no new positions being opened, and only one being closed. This is fairly standard for value investors, who have much longer-term outlooks with their investments. Let’s check out the top five value plays of Mr. Tilson through the first quarter of 2015 and have a look at the fundamentals of these companies as well as his thoughts on them courtesy his latest investor letter, a copy of which can be downloaded here.
Tilson’s top pick remains Howard Hughes Corp (NYSE:HHC) for the sixth straight quarter. His position in the developer of master planned communities was increased by 8% during the quarter to 50,425 shares valued at $7.82 million. Tilson has re-evaluated his estimates for the company from three years ago, and believes there is far greater growth yet ahead for the stock.
“At that time, I estimated that HHC’s intrinsic value was ~$125/share. So with the stock now at $144 today, why do I still hold it? Because there have been numerous favorable developments in the past 28 months – the company is executing superbly and the macro environment is providing a strong tailwind – so I believe intrinsic value is likely above $200”, Tilson said in the investor letter.
Before adjustments, Howard Hughes Corp (NYSE:HHC) posted quarterly earnings for the fourth quarter of 2014 that handily beat estimates at $0.51 per share, with estimates coming in at just $0.19. Revenue also destroyed estimates by more than 80%. After dipping to a 52-week low in January, Howard Hughes Corp (NYSE:HHC) has rebounded by more than 25% since, and there appears to be more room for growth as Tilson suggests. Shares are actually down since its last earnings report on March 2, despite the overwhelming positive financial results and the future prospects of the company look good, with over $2 billion worth of projects under construction. While Tilson has the greatest exposure to Howard Hughes in our database, Murray Stahl’s Horizon Asset Management also has high exposure to the stock, along with a very large position of over 5.14 million shares.
Platform Specialty Products Corp (NYSE:PAH) climbs into second position in Tilson’s portfolio, after he increased the position by a hefty 41% during the first quarter. That brought the value of the position up to $6.96 million, with it consisting of 271,140 shares. After nearly doubling in value within mere months of its IPO, shares of Platform Specialty Products Corp (NYSE:PAH) have stalled since, essentially flat over the last 11 months. Not even the involvement of a very different kind of investor to Tilson, activist Bill Ackman, has helped the producer of specialty chemicals to grow during that time. Tilson partially attributes this performance malaise to its rapid growth, which analysts have yet to catch up with.
“In a remarkably short period of time (just over a year), PAH has become a large company (sales and EBITDA this year should exceed $3 billion and $750 million, respectively), yet it’s very difficult to analyze because of the large recent acquisitions and lack of analyst coverage. This weighs on the stock for now, but over the next year I expect PAH to become a more “normal” company and the valuation to reflect this,” Tilson said.
Regardless, Platform Specialty Products Corp (NYSE:PAH) has many proponents among the funds we track. Funds were particularly bullish on the company heading into 2015, with fund ownership increasing to 35 from 27, and invested capital increasing to $2.04 billion from $1.59 billion despite shares actually dipping about 8% during the quarter. The bulls certainly had it right, as Platform Specialty Products Corp (NYSE:PAH) is up by 18% year-to-date.
Reading International, Inc. (NASDAQ:RDI) remains in third position in Tilson’s portfolio, where it sat last quarter after the position was newly opened at that time. Tilson bulked the position up by another 5% to 371,106 shares with a value of $4.99 million. Another real estate company, Reading International, Inc. (NASDAQ:RDI) primarily operates in the cinema segment, with ownership of 58 cinemas boasting a total of 476 screens in the United States, Australia, and New Zealand. Reading International, Inc. (NASDAQ:RDI) unveiled its first quarter results yesterday, reporting net income of $3.1 million. The company’s cinema segment enjoyed increased revenue from a year ago, while the real estate segment’s revenue dipped. Tilson anticipates the family-run company will begin to unlock value for shareholders.
“The patriarch of the controlling family passed away last year, and there’s reason to believe that his three children, who now control and run the company, are eager to unlock value for shareholders. I believe intrinsic value is at least $15/share and likely above $20. I established this position last fall from ~$9-11/share and it closed yesterday at $12.35,” Tilson said.
Reading International, Inc. (NASDAQ:RDI) had limited fund ownership among the funds in our database, with billionaire Jim Simons’ quant fund Renaissance Technologies having the only other substantive position.
Air Products & Chemicals, Inc. (NYSE:APD) sits in fourth position in Tilson’s portfolio with 29,728 shares valued at $4.50 million, the share ownership up by 15% over the first quarter. In his investor letter, Tilson explained some of the rationale behind adding yet more shares to his position in Air Products & Chemicals, Inc. (NYSE:APD).
“There is no reason why APD’s performance can’t improve to Praxair, Inc. (NYSE:PX)’s level over time – and after seeing the new CEO, Seifi Ghasemi, at an investor dinner last month, I now have greater conviction that it will happen more quickly than I’d anticipated, so I added to our position. He’s that impressive and his track record is that good,” Tilson said.
Air Products & Chemicals, Inc. (NYSE:APD) does have other things going for it as well, including ranking as the most stable dividend stock, with a dividend that hasn’t been reduced in 28 years. Ackman has had a much greater effect on this particular stock, with his activist involvement leading to the installation of that new CEO. Ackman is the largest shareholder in our database, with exposure of over 18% to the stock, which is up by 1% year-to-date.
JetBlue Airways Corporation (NASDAQ:JBLU) lands in fifth spot in Tilson’s portfolio. The airliner was the only position in his top five which he decreased during the quarter, though he expressed that the fundamentals of the industry are great (he also holds smaller long positions in Delta Air Lines, Inc. (NYSE:DAL) and American Airlines Group Inc (NASDAQ:AAL)). He also believesJetBlue Airways Corporation (NASDAQ:JBLU) is finally doing more to appease shareholders and not just its customers.
“The company has historically favored its customers over its shareholders, which can be a good thing of course, but I think it was taken to an extreme. For example, the company had fewer seats in its planes than its competitors, which meant more legroom – but less profit. Now, it’s adding two more rows, which will increase profits materially, yet is still keeping a few rows with extra legroom for passengers who are willing to pay a bit extra for it,” Tilson said.
Those moves have contributed to a huge 2015 thus far for JetBlue, which we ranked late last year as an airline stock to grab before it flew away on the wings of rising shares; it has been doing just that, with shares up by 33% so far in 2015. JetBlue Airways Corporation (NASDAQ:JBLU) had a number of bullish new investors during the fourth quarter, including Will Snellings’ Marianas Fund Management and Carson Yost’s Yost Capital Management.
Value investors like Mr. Tilson spend considerable time and money conducting due diligence on each company they invest in, which makes them the perfect investors to emulate. However, we also know that the returns of hedge funds on the whole have not been good for several years, underperforming the market. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performances as a whole have been poor. A portfolio of the 15 most popular small-cap stocks among funds outperformed the S&P 500 Total Return Index by 95 basis points per month between 1999 and 2012 in backtesting. The exceptional results of this strategy got even better in forward testing after the strategy went live at the end of August 2012. A portfolio consisting of the 15 most popular small-cap stock picks among the funds we track has returned more than 137% and beaten the market by more than 82 percentage points since then, and by 4.6 percentage points in the first quarter of this year (see the details).
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