Billion Dollar Hedge Fund Iridian Asset Management Loves These Five Stocks. Should You?

David Cohen and Harold Levy, a duo of special situation investors with a focus on depressed stocks that go through significant changes, founded Iridian Asset Management in 1996. Because of in-depth research and solid risk management, Iridian has grown from humble beginnings to have assets under management of around $12.7 billion as of the end of the third quarter. Given that Iridian recently filed its 13F for the September quarter, let’s examine the fund’s top stock picks of W. R. Grace & Co (NYSE:GRA), Sealed Air Corp (NYSE:SEE), Lowe’s Companies, Inc. (NYSE:LOW), Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Delta Air Lines, Inc. (NYSE:DAL) and see how Iridian has been trading them and what these stocks may have to offer retail investors.

Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by 53 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. a 48.7% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

#5 Valeant Pharmaceuticals Intl Inc (NYSE:VRX)

Shares held (as of September 30): 2.72 million
Total Value (as of September 30): $484.62 million
Percent of Portfolio (as of September 30): 4.10%

Shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) have been extremely volatile, as investors worry about the company’s relationship with the specialty pharmacy Philidor and the extent to which potential drug price regulations will negatively affect the company’s future growth prospects. Some analysts are optimistic, however, such as Mizuho’s Irina Koffler, who thinks Valeant will still be worth around $100 per share in a liquidation scenario, a level it has now fallen well below. Bill Ackman is also optimistic, as his fund, Pershing Square recently added another 2 million shares to its previous holding of 19.47 million shares held at the end of June. Iridian, meanwhile, cut its holding in the stock by 8% quarter-over-quarter.

#4 Lowe’s Companies, Inc. (NYSE:LOW)

Shares held (as of September 30): 7.69 million
Total Value (as of September 30): $530.18 million
Percent of Portfolio (as of September 30): 4.48%

Shares of Lowe’s Companies, Inc. (NYSE:LOW) are up by 7.88% year-to-date on the back of the strong economy and red-hot housing market. With the U.S unemployment rate recently falling to 5%, more consumers will have credit to renovate their existing homes, which will mean more demand for home improvement chains such as Lowe’s. Meanwhile, Lowe’s trades at a reasonable forward PE of 18.5. Stephen Mandel‘s Lone Pine Capital owned 7.05 million shares of Lowe’s at the end of June.

Iridian’s top three stock choices heading into the fourth quarter are sized up on the next page.

#3 Sealed Air Corp (NYSE:SEE)

Shares held (as of September 30): 11.45 million
Total Value (as of September 30): $536.92 million
Percent of Portfolio (as of September 30): 4.54%

Sealed Air Corp (NYSE:SEE) shares have done well in 2015, with the stock up by a respectable 14.32% year-to-date. Despite the currency headwinds and emerging market softness, the company has beaten earnings estimates every quarter this year, with the company reporting EPS of $0.70 on revenues of $1.75 billion for its third quarter. The EPS beat estimates by $0.13 per share, while the revenue was in-line. The stock trades at a reasonable 18.4-times forward P/E. Andreas Halvorsen‘s Viking Global was long 12.82 million shares of Sealed Air Corp at the end of June.

#2 W. R. Grace & Co (NYSE:GRA)

Shares held (as of September 30): 6.34 million
Total Value (as of September 30): $589.78 million
Percent of Portfolio (as of September 30): 4.99%

Financial analysts are optimistic on W. R. Grace & Co (NYSE:GRA), as one analyst has a ‘Strong Buy’ rating, five have a ‘Buy’ rating, and three have a ‘Hold’ rating. Overall, analysts have a consensus price target of $115.50 per share, indicating 16.71% upside. Hedge funds are bullish too, as 45 funds out of the 730 elite funds that we track reported a cumulative stake in W. R. Grace & Co (NYSE:GRA) shares worth $3.29 billion as of the end of the second quarter. The funds’ positions accounted for 45.10% of the stock’s float on June 30, with John Griffin‘s Blue Ridge Capital owning a stake of 3.19 million shares.

#1 Delta Air Lines, Inc. (NYSE:DAL)

Shares held (as of September 30): 13.45 million
Total Value (as of September 30): $603.3 million
Percent of Portfolio (as of September 30): 5.10%

More than a year after its sharp decline, Brent is still below $50 per barrel. For airlines such as Delta Air Lines, Inc. (NYSE:DAL), the low Brent price is welcome news, as analysts estimate that around half of the fuel cost benefit is going straight to Delta’s EBIT (consumers are winning too, with cheaper travel costs). Shares are up by 5% year-to-date and will continue to do well as long as oil prices stay low and the economy continues to improve. Delta Airlines was a popular holding with the smart money, as 114 funds were long Delta at the end of the second quarter.

Disclosure: None