David Einhorn, one of the most popular hedge fund managers in the US, is the founder and president of Greenlight Capital, a fund with more than $11 billion in Assets Under Management and an equity portfolio of $7.65 billion as of the end of March. Greenlight managed to return around 19.5% per year since its inception in 1996 and made its name with some big short bets, including against Lehman Brothers before its collapse in 2008. For the first three months of 2015, Greenlight’s funds inched down by 1.7% net of fees (according to its letter to investors), but some of its bets proved rather profitable such as long positions in Apple Inc. (NASDAQ:AAPL) and Sunedison Inc (NYSE:SUNE), which represented Greenlight’s first and third-largest equity positions. However, Greenlight also had a big looser in its equity portfolio, Micron Technology, Inc. (NASDAQ:MU), whose stock declined by 23% during the January-March period, and which represented its second-largest holding at the end of the first quarter.
However, in this article we will focus on Einhorn’s top small-cap picks. The reason is simple, these stocks fall under the category we are interested in under our small-cap strategy and we determined that historically, they delivered the highest monthly return across all type of stocks in Greenlight’s equity portfolio. Through backtests, we analyzed that imitating Greenlight’s small-cap ideas between 1999 and 2012, would have delivered a monthly return of 1.49%, which was more than 1.0 percentage points higher than the S&P 500 Total Return Index’s gain, and was above the average monthly return for all stocks, which amounted to 1.23%. These returns support our initial hypothesis that imitating most popular small-cap ideas among hedge funds can generate much better returns that simply focusing on their large-cap picks. In backtests, this strategy managed to outperform the S&P 500 Total Return Index by nearly one percentage point per month and for the last 2.5 years it generated returns of more than 130%, which beat the S&P 500 ETF (SPY) by over 80 percentage points (read more details here).
With this in mind, let’s take a look at Greenlight’s largest positions represented by small-cap stocks. On the first space is Aecom (NYSE:ACM), in which the fund owns 6.56 million shares, valued at $202.10 million, which makes it the 12th-largest position in its equity portfolio. Aecom is a $5.0 billion Engineer & Construction company that provides management and technical support services. The stock is up by more than 8% since the beginning of the year and analysts see more potential over the longer-term, taking into account that $38.30 average price target. Moreover, last week, Argus boosted its price target on Aecom (NYSE:ACM)’s stock to $43.00 from $38.00 per share with ‘Buy’ rating. Greenlight is the largest shareholder of Aecom (NYSE:ACM) among the funds we track, followed by Curtis Macnguyen’s Ivory Capital with 2.88 million shares as of the end of March.
Life Time Fitness, Inc. (NYSE:LTM) represents the second small cap pick of Greenlight Capital, with the fund disclosing a $128.52 million position that contains 1.81 million shares. The stock gained more than 26% since the beginning of the year, jumping in March amid news regarding the acquisition of Life Time Fitness, Inc. (NYSE:LTM) by Leonard Green & Partners and TPG Capital, L.P., private equity firms. The value of the transaction amounts to around $4.0 billion and Life Time Shareholders will receive $72.10 per share in cash. Greenlight initiated a stake during the fourth quarter of 2014, a couple of months after the company announced plans to explore some strategic options. Overall, the news regarding the acquisition surged the popularity of Life Time Fitness, Inc. (NYSE:LTM) among investors and in the latest round of 13F filings, 28 funds disclosed holding long positions in the company, up from 20 a quarter earlier. Billionaire Israel Englander‘s Millennium Management boosted its position in the company by almost a sevenfold during the first quarter to 550,800 shares.