Richard L. Haydon’s Tipp Hill Capital Management LLC is a New York-based hedge fund founded in July 2009. Formerly known as Yield Capital Partners (Y/Cap Management), under which its filings are still listed, the fund has a two-pronged investment strategy: first, a value-oriented long/short approach and second, an approach targeting investments driven by catalysts such as M&As, spin-offs, or managerial changes. The former strategy focuses on companies with strong free cash flow generation, among other factors, and has an investment horizon of one-to-three years and a target return of 50% within two years, while investments under the latter approach last less than a year, with an annual return target of 20-30%. With its latest 13F out, let’s take a closer look at Tipp Hill’s top investments in Visteon Corp (NYSE:VC), Barrick Gold Corporation (USA) (NYSE:ABX),WMIH CORPORATION (NASDAQ:WMIH), ON Semiconductor Corp (NASDAQ:ON), and Frontier Communications Corp (NASDAQ:FTR).
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and that they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk-adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks have managed to return 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
#5 Frontier Communications Corp (NASDAQ:FTR)
Shares held (as of September 30): 1.05 million
Total Value (as of September 30): $4.99 million
Percent of Portfolio (as of September 30): 5.11%
Tipp Hill increased its position in Frontier Communications Corp (NASDAQ:FTR) by 600% to 1.05 million shares in the third quarter, good for 5.11% of its equity portfolio. With a dividend yield of 8.17%, Frontier Communications is a dividend play that the analysts at Cowen & Co think is safe. According to the Cowen analysts, “Frontier has undergone a makeover with transformative acquisitions including an upcoming and under-appreciated Verizon transaction that will favorably shift revenue mix and provide additional FCF cushion for what we view as the industry’s best dividend”. 41 funds of the 730 that we track reported holdings worth $604.55 million in the stock as of the end of June, with Seth Klarman‘s Baupost Group owning 13.5 million shares at the end of the second quarter.
#4 ON Semiconductor Corp (NASDAQ:ON)
Shares held (as of September 30): 700,000
Total Value (as of September 30): $6.58 million
Percent of Portfolio (as of September 30): 6.74%
Tipp Hill kept its position in ON Semiconductor Corp (NASDAQ:ON) constant in the third quarter, with it accounting for 6.74% of its portfolio. Shares of the semi-conductor company are up by 8.59% year-to-date in part due to speculation that the company could participate in the wave of M&A in the sector as the era of cheap debt comes to an end. ON semiconductor could be in the market for an acquisition, as it has successfully acquired other semiconductor companies before. Hedge funds were mixed on ON Semiconductor Corp in the second quarter. Although the number of funds owning shares of the company increased to 40 from 32, the total value of their holdings in the stock declined to $766.26 million from $871.89 million. David Einhorn‘s Greenlight Capital owned 17.31 million ON shares at the end of June.
#3 WMIH CORPORATION (NASDAQ:WMIH)
Shares held (as of September 30): 2.82 million
Total Value (as of September 30): $7.34 million
Percent of Portfolio (as of September 30): 7.52%
Tipp Hill increased its stake in WMIH CORPORATION (NASDAQ:WMIH) by 83,000 shares in the third quarter. The company has billions in net operating losses that management could monetize by acquiring profitable companies, making it a risk/reward proposition. Other hedge funds seem to think the risk is too high, as of the more than 700 elite funds that we track, just four (including Tipp Hill) were long WMIH, owning $26.63 million worth of the company’s shares on June 30, down from five funds with $23.13 million worth of shares on March 31.
Tipp Hill’s top two stock picks for the fourth quarter are disclosed on the next page.