American Realty Capital Properties Inc (ARCP), LIBERTY GLOBAL PLC (LBTYK) – Best Hedge Fund Managers: David Simon’s Stock Picks

Page 1 of 2

We have read dozens of articles about hedge funds and hedge fund advertising over the last few weeks. None of them were 100% accurate and most of them were filled with inaccuracies. The number one mistake they made was comparing hedge fund returns to 100% long S&P 500 index. Hedge funds are almost always hedged and in some cases their market exposure can be negative. You shouldn’t be surprised that S&P 500 index is beating hedge funds in bull markets. The same way that you shouldn’t be surprised that the weather is extremely pleasant in Buffalo during summer months. You can predict when the winter is coming to Buffalo and avoid it. Unfortunately you can’t say the same thing about the S&P 500 index. It is 100% long no matter what happens.

Historically hedge funds’ long stock picks did beat the market significantly. They are great at picking winners. To demonstrate this fact and help our readers beat the market we started sharing the most popular small-cap stocks among hedge funds at the end of August 2012. These are stocks with market values between $1 billion and $5 billion, and they are the consensus picks of dozens of prominent hedge funds. Over the last 11 months this simple strategy returned 55.9%, vs. 22.5% gain for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). We also backtested this strategy and it managed to outperform the S&P 500 index by 18 percentage points per year between 1999 and 2009 (see the details).

The second mistake financial media made was claiming that it isn’t possible to pick the best hedge fund managers. We may not be able to pick the better fund manager between two randomly picked hedge fund managers but we will know when we meet a great hedge fund manager. The same phenomenon exists in sports. You may not be able to pick the better football player between two randomly picked players but you know that Brett Favre or Tom Brady are among the best players. Four months ago we published an article on Marketwatch with the title “3 stock picks from the next David Einhorn” and shared the stock picks of Michael Castor. Yeah, we know you never heard of Michael Castor before. Castor’s first pick, Cardinal Health Inc (NYSE:CAH) returned 21.3% since we published that article. Castor’s second pick, NPS Pharmaceuticals, Inc. (NASDAQ:NPSP), gained 77%. S&P 500 ETF’s 8.5% return during the same period barely outperformed Castor’s third pick Anacor Pharmaceuticals Inc (NASDAQ:ANAC)’s 7.1% gain. Castor’s three picks averaged more than 35% in four months.

In this article we will share 3 stock picks by another great hedge fund manager, David Simon of Twin Capital, who demonstrated that he can generate an annual alpha of around 7 percentage points per year. Twin Capital’s annual returns ranged between 6.5% and 13.2% between 2008 and 2012. This means David Simon underperformed the market during most of this period yet managed to deliver a cumulative return of 53.4% vs. a gain of 8.6% for the S&P 500 index during the same period. How is this possible? Because he is hedged and he can deliver alpha, David Simon managed to return 6.5% in 2008 when most of retirees’ 401ks turned into 201ks.

Last month we sat down with David Simon and asked him about his best investment ideas. Here is what he said:

“I think one of our best investment ideas is a triple net lease real estate investment trust called American Realty Capital Properties Inc (NASDAQ:ARCP).  The symbol is American Realty Capital Properties Inc (NASDAQ:ARCP), and it’s yielding about 6.4% right now. They’ve done a lot of acquisitions lately, and they’ve grown from a market cap of 140 million to about 5 to 6 billion in the next three months. This is all this year. Their dividend right now is at $0.91, I think, and on October 1st, it goes to $0.94. We have it going to well over $1 next year.

There’s one acquisition that’s pending a go shop period which we believe will not be a problem. They’ve already issued stock to finance that acquisition plus another acquisition from GE Capital of QSR triple net properties. Then we believe there’s one more acquisition on the back burner for October or November.

Once all these acquisitions are done, based on if they could still finance where we think they could finance 7-year paper, we think it’s accretive to the tune of about 25% to 35% to next year’s funds from operations. We think they’ll grow their dividends at half the rate of FFO. So, they should grow the dividend at least 15%. It should go from about $0.94 to at least $1.08. So, at $1.08, you’re talking about – based on what the stock price is now – well over a 7% yield.”

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!