Much has been said about hedge fund underperformance this year, but believing in that general assessment can mislead people into overlooking outstanding performances by certain hedge funds. We at Insider Monkey found out that the 30 mid-cap stocks preferred by the best performing hedge funds generated a return of 18% in the 12 months ending November 21, surpassing the S&P 500 Index’s 7.6% return in the same period, with as more than 51% of the stocks in the index fail to beat the benchmark. In addition, based on Inside Monkey’s research into 659 hedge funds, 627 funds containing at least 5 long positions in companies valued at $1 billion or more have gained 8.3% in returns on average from their long picks, a full 5.0 percentage above S&P 500 ETF returns.
Billionaire Seth Klarman’s Baupost Group is one of the outperforming hedge funds. Earlier this year, Time called Klarman “the Next Warren Buffett” due to his investing prowess, as the Boston-based hedge fund amassed $22.6 billion in net profit, at a yearly annual return rate of 16.4%, between 1982 and 2015. Based on Insider Monkey’s comprehensive backtests, Baupost Group returned 1.22% per month between 1999 and 2012 from its positions in companies with market cap above $10 billion, compared with S&P 500’s 0.22% monthly gains. The Boston-based hedge fund thus beat the index by 1.0 percentage point per month, or 12% on an annualized basis, in this period. We note that Klarman is a conservative investor with unconventional methods, which include investments in unpopular, undervalued assets, as well as the use of complex derivatives and put options. Having this sterling performance in mind, let’s have a look at Baupost Group’s top picks in the third quarter in companies with market caps above $10 billion.
Cheniere Energy, Inc. (NYSEMKT:LNG) remained Baupost Group’s biggest holding despite the hedge fund’s sale of about 2.0 million shares during the third quarter. Baupost Group owned 27.84 million Cheniere Energy shares worth $1.21 billion at the end of September. The heft of Baupost’s holdings in Cheniere Energy is notable given the sharp fall in gas prices earlier this year. The liquefied natural gas company recently called off its proposal to merge with Cheniere Energy Partners LP Holdings LLC (NYSEMKT:CQH). On the back of the news, Credit Suisse reaffirmed its “Outperform” rating on Cheniere Energy’s stock, but trimmed the price target to $52 from $54, saying that the previous valuation was based on the assumption that the merger will be completed. Year-to-date, Cheniere Energy’s stock grew by more than 16%. A total of 45 funds tracked by Insider Monkey held positions in Cheniere Energy, Inc. (NYSE MKT:LNG) at the end of the third quarter, compared to 42 funds at the end of June.
In Allergan plc (NYSE:AGN), Baupost Group held slightly over 2.0 million shares valued at $461.08 million at the end of September. Allergan reported third-quarter revenues and EPS of $3.62 billion and $3.32, respectively, which were below consensus estimates, despite notable increases in sales of drugs such as Botox and Restasis. In addition, the drug maker expanded its share buyback plan to $15 billion from $10 billion. Following the report, analysts from Leerink, UBS, and RBC Capital slashed their price targets on Allergan to $266 from $294, to $240 from $300, and to $279 from $300, respectively, while keeping their “buy” recommendations. Recently, Allergan has been hit with stock decreases amid news of incoming US President Donald Trump’s plan to crack down on rising drug prices and the US patent regulator’s approval of a request for a review on Restasis’ IP. Year to date, Allergan’s stock suffered a sharp 39% fall, and is recently at record lows not reached since early 2014. Nevertheless, 115 hedge funds tracked by Insider Monkey had investments in Allergan plc (NYSE:AGN) at the end of the third quarter.
Baupost Group obtained a stake in Dell Technologies Inc (NYSE:DVMT) amounting to 6.65 million shares worth $317.99 million at the end of the third quarter, as a result of the $60 billion merger between Dell Inc. and EMC Corp. The transaction, completed on September 7, triggered the conversion of the hedge fund’s holdings in EMC, amounting to about 56.96 million shares worth $1.55 billion as of the end of the second quarter. EMC shareholders such as Baupost received $24.05 per share in cash and around 0.11 shares of Dell Technologies stock for each EMC share they held. Dell Technologies’ stock grew more than 10% since the merger’s completion. Among hedge funds tracked by Insider Monkey, 86 funds held positions in Dell Technologies Inc. (NYSE: DVMT) worth $3.59 billion in aggregate at the end of the third quarter.
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