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Herbalife Ltd. (HLF) & Other Top Picks of Route One Investment Company

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At Insider Monkey we analyze equity portfolios of over 700 hedge funds in order to identify best performing stocks in which hedge funds invest their money. Through years of research we discovered that following the most popular stocks among hedge funds is not the best strategy to beat the market, because hedge funds usually invest in large-cap stocks which are more efficiently priced. However, this doesn’t mean that a smaller investor can’t get an edge in beating the market by investing in the same stocks as hedge funds do. The key is to follow hedge funds’ small-cap picks. With this in mind we developed a strategy that is based on forming a portfolio consisting of 15 most popular small-cap picks among hedge funds. Our strategy provided a cumulative return of 132% in the last 2.5 years and beat the market by 79 percentage points.

Nevertheless, large-cap stocks in which hedge funds invest can also provide some interesting points, especially when a company is targeted by an activist investor, which usually sense the stock higher. Moreover, the stock of a company can go up when an activist that is short loses a fight. This is the case of Herbalife Ltd. (NYSE:HLF), which in Wednesday intraday trading was shaping up as one of the top gainers, and closed 13% in green. The jump came after a court dismissed a lawsuit against Herbalife that alleged the maker of nutritional products portrayed itself as a legitimate company, while in fact it was an illegal pyramid scheme. The rulling represents a lost battle by notorious activist Bill Ackman of Pershing Square, who has been campaigning against the company and claiming that it had fraudulently inflated its stock price, as well as other short-sellers. However, many other investors have benefited from the Herbalife Ltd. (NYSE:HLF)’s win, although the stock still trades significantly below its 52-week high and is down by 28% over the last year. Among the funds that we track, investors with long positions in Herbalife include Carl Icahn and George Soros, who own 17.0 million shares and 3.45 million shares respectively; Soros upped his stake in the company by 83% during the fourth quarter of 2014.

Herbalife Ltd. (NYSE:HLF)

While the story with Herbalife Ltd. (NYSE:HLF) is far from being over, some investors bet on a positive outcome and that Herbalife’s stock will rebound. The last round of 13F filings showed that seven hedge funds among those that we track initiated long positions in the company, the largest stake of them being held by William Duhamel‘s Route One Investment Company. Route One is a relatively small hedge fund, which holds a diversified equity portfolio valued at around $567.55 million. However, even though the fund’s equity portfolio is small, it invests primarily in large-cap stocks, his top three holdings being represented by Twenty-First Century Fox Inc (NASDAQ:FOX)Post Holdings Inc (NYSE:POST), and Microsoft Corporation (NASDAQ:MSFT).

In Twenty-First Century Fox Inc (NASDAQ:FOX), Route One initiated a stake during the third quarter of 2013, and since then the position was slightly raised to 3.01 million shares held at the end of 2014, from 2.81 million shares held initially. The stock remained almost flat since then. Meanwhile, last year, the media and entertainment company run by Rupert Murdoch made a bid to buy Time Warner Inc (NYSE:TWX). The combination of both companies could create one of the largest media conglomerates in the world, but in August Fox retracted its offer. Nevertheless, since Twenty-First Century Fox Inc (NASDAQ:FOX) is one of the largest media companies by market capitalization, investors are still bullish as the data from the last round of 13F filings showed. A total of 90 funds among those that we track disclosed long positions in Twenty-First Century Fox Inc (NASDAQ:FOX), including 11 funds led by billionaires, among whom is Jeffrey Ubben’s ValueAct Capital, which raised its stake by 21% during the fourth quarter to 30.30 million shares.

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