Gabalex Capital’s Top Stock Picks For Q4

Gabalex Capital is a New York-based long/short equity hedge fund established by Nigel Greig and Kenneth Cowin in 2008. Prior to founding Gabalex Capital, Mr. Greig worked at the now defunct investment banking giant Bear Stearns for over a decade. While Mr. Cowin serves as the COO, Mr. Greig heads the fund and is also its largest shareholder. As of January 2015, Gabalex Capital managed almost $400 million of investors’ money. The fund recently submitted its 13F filing with the SEC for the reporting quarter ending September 30. According to the filing, Gabalex Capital’s US equity portfolio at the end of September was worth nearly $257 million, $21.17 million less than what it was worth at the end of June. By taking a closer look at the filing one can conclude that Gabalex Capital runs a fairly concentrated portfolio by hedge fund standards with open positions in just 22 stocks and its top 10 holdings accounting for 83.06% value of its equity portfolio. Research done by Insider Monkey over the years shows that generally hedge funds which run a highly concentrated portfolio put a special emphasis on thoroughly studying a stock before buying it and hence those stock picks have a slight edge over other stocks when it comes to performance. Taking this into account, in this article we will be analyzing Gabalex Capital’s top five stock picks from the end of the third quarter and try to figure out why the fund is betting big on these companies.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 53 percentage points (102 % return vs. S&P 500’s 49% gain) over the last 37 months (see the details here).

#5 Priceline Group Inc (NASDAQ:PCLN)

Shares Owned by Gabalex Capital (as of September 30): 15,000 shares

Value of Holding (as of September 30): $18.553 Million

Gabalex Capital reduced its stake by 25% or 5,000 shares in online travel and reservation services provider Priceline Group Inc (NASDAQ:PCLN) during the third quarter. Owing largely  to the decent surge they saw in February and more recently during October, shares of the company are trading up 27.16% year-to-date. The announcement by the company in October that it will be forming a strategic partnership with TripAdvisor was a major contributor to the rise that its stock saw during that period. Priceline Group Inc (NASDAQ:PCLN) is scheduled to report its fiscal 2015 third quarter results on November 9 and the expectations among analysts include EPS of $24.23 on revenue of $3.05 billion, above the EPS of $21.11 on revenue of $2.84 billion it reported for the same quarter last year. Stephen Mandel’s Lone Pine Capital holds Priceline among its top picks,  according to its latest investor letter (see article).

#4 Berkshire Hathaway Inc. (NYSE:BRK.B)

Shares Owned by Gabalex Capital (as of September 30): 150,000 shares

Value of Holding (as of September 30): $19.56 Million

Though Gabalex Capital didn’t make any changes to its stake in Berkshire Hathaway Inc. (NYSE:BRK.B) during the third quarter, the 4.19% decline that the company’s shares suffered during that period meant that the value of Gabalex Capital’s holding also inched down. Shares of Berkshire Hathaway Inc. (NYSE:BRK.B) have suffered a gradual decline throughout 2015 and even the bounce they saw during October hasn’t provided much of a respite as they trade with year-to-date loss of 9.2%. On November 6, the company declared its fiscal 2015 third quarter earnings. Operating earnings for the quarter came in-line with Street’s expectations of $1.85 per class B share, but revenue at $58.99 billion was lower than the $61.12 billion figure the Street had expected. Whitney Tilson of Kase Capital has reiterated his bullish position on Berkshire in the latest letter to investors, saying that the stock is trading considerably below its intrinsic value.

#3 Home Depot Inc (NYSE:HD)

Shares Owned by Gabalex Capital (as of September 30): 275,000 shares

Value of Holding (as of September 30): $31.76 Million

Moving on, shares of home improvement retailer Home Depot Inc (NYSE:HD) have had a nice run in 2015. After witnessing a significant surge during the first two months of the year, they remained in a range through the next six months, but again rallied in October and are now up more than 20% year-to-date. The company is scheduled to report its third quarter earnings on November 17 and analysts expect the company to declare EPS of $1.22, $0.09 better the $1.13 it reported for the same quarter last year. On September 16, analysts at Oppenheimer reiterated their ‘Outperform’ rating and $133 price target on the stock. First Eagle Investment Management became heavily bullish on Home Depot Inc (NYSE:HD) during the third quarter, more than tripling its holding in the company to almost 1.2 million shares.

 #2 Wal-Mart Stores, Inc. (NYSE:WMT)

Shares Owned by Gabalex Capital (as of September 30): 500,000 shares

Value of Holding (as of September 30): $32.42 Million

It seems the continuous dismal performance of the stock of the world’s largest retailer Wal-Mart Stores, Inc. (NYSE:WMT) shook Gabalex Capital’s faith in the company a little bit as the fund sold 16% or 100,000 shares of the company during the third quarter and brought its total holding in it down to 500,000 shares. After losing 8% during the third quarter, the stock of Wal-Mart Stores, Inc. (NYSE:WMT) suffered its sharpest decline in 25 years on October 14 after the company warned investors that its earnings could decline by as much as 12% next year due to higher wages, lower prices and spending on e-commerce. The company declared mixed fiscal 2015 third quarter results, reporting EPS of $1.08 on revenue of $120.20 billion. Richard Pzena’s Pzena Investment Management reported holding 6.32 million shares of Wal-Mart as of the end of September.

#1 W W Grainger Inc (NYSE:GWW)

Shares Owned by Gabalex Capital (as of September 30): 180,000 shares

Value of Holding (as of September 30): $38.702 Million

Finally, even after its stock having suffered a 8.67% decline during the third quarter and Gabalex Capital leaving the stake unchanged, the maintenance and repair supplies distributor W W Grainger Inc (NYSE:GWW) continued to remain the fund’s top stock pick at the end of the third quarter. Recently on October 16, the stock declined by more than 5% in a day after it reported its fiscal 2015 third quarter earnings. While analysts had expected W W Grainger Inc (NYSE:GWW) to report EPS of $3.06 on revenue of $2.55 billion, the company declared EPS of $3.03 on revenue of $2.53 billion. For the same quarter last year the company had reported EPS of $3.30 on revenue of $2.60 billion. On October 20, analysts at Credit Suisse reiterated their ‘Outperform’ rating on the stock, while reducing their price target on it to $232 from $292. Israel Englander‘s Millennium Management initiated a stake in W W Grainger during the second quarter by purchasing 36,633 shares.

Disclosure: None