Like anything in life, formulating a successful investment strategy requires focus. At Insider Monkey, we've found that historically, by focusing on the best stock picks of the best hedge funds, retail investors have been able to beat the market. Our small-cap strategy beat the market by 18% a year for more than a decade in our back tests, and since we started sharing this strategy with the public, it has returned another 18% in just 5 months (learn how to use this yourself).
With that in mind, our detailed fund-by-fund analysis system sheds light onto the inner workings of hundreds of the world's most successful hedge funds, but let's take this time to discuss one that often flies under the mainstream media's radar: Jamie Zimmerman’s Litespeed Management. Zimmerman founded Litespeed in 2000, and one of its most impressive periods came when it returned 118% between October 2000 and December 2005 versus -13% for S&P 500 index. With around $1 billion in assets under management, Litespeed is primarily an event-driven hedge fund focusing on special situations, distressed securities, and bankruptcies.
It has a decently sized equity portfolio of about $300 million; let's take a look at what Zimmerman's top five holdings were at the end of the fourth quarter. Though this information is reported with a delay, it's important to realize that this lag has actually helped piggyback investors beat the market by a greater margin in the past (more on that here).
Tronox Ltd (NYSE:TROX) was Zimmerman's No. 1 overall holding heading into 2013, and the titanium dioxide pigment maker has been in this spot since the third quarter of last year, when the position was originally established. Among the 450 top tier managers we track, Tronox saw its hedge fund interest decrease by 10% in Q4, though notable funds were upping their stakes. Along with Zimmerman's purchase of 25% more shares, Israel Englander, Chuck Royce were bullish as well. Jim Simons (see full equity portfolio here) and Louis Bacon also established new positions during this three-month period.
Interestingly, Zimmerman's bet appears to have paid off, as shares of Tronox are already up 12.5% year-to-date, with about half of this appreciation coming in the past week. Much of Mr. Market's optimism may be due to speculation that the company's CEO recently said Tronox “has reasons to think about” snatching up assets from Rockwood Holdings. Equally as important, though, the company also beat the Street's revenue estimate by 4%, though it missed earnings numbers by 60%. There's much to focus on here, but ardent investors should pay attention to how the smart money is trading this stock moving forward.
Macquarie Infrastructure Company LLC (NYSE:MIC) has been in Zimmerman's top five for five consecutive quarters, and the stock now sits at the highest place it has even been in her equity portfolio: No. 2. Macquarie was originally a new position for the fund manager in the third quarter of 2011, and it has been a marvelous investment since, popping by nearly 130%. This is a very diversified infrastructure company giving investors a very bullish play in the gas segment; Wall Street expects an upside of at least 14% from current levels, and the sell-side as a whole forecasts long-term EPS growth to crack 10% a year through at least 2017. There are plenty of reasons for investors, and Zimmerman, to be bullish.
Avon Products, Inc. (NYSE:AVP) and Diamond Foods, Inc. (NASDAQ:DMND) sit at the No.'s 3 and 4 spots in the hedge fund manager's equity portfolio, and each stock has risen by double-digits in 2013—Avon by 36.1%% and Diamond Foods by 13.6%. Zimmerman was also upping her stake in both companies by an average of 16% in the fourth quarter, and the hedge fund industry's interest (of the funds we track) increased by an average of 4% in this duo.
Avon Products, Inc. (NYSE:AVP), the beauty product manufacturer and marketer, has seen the number of Wall Street analysts who hold "Buy" ratings on its stock jump by two-thirds over the past three months, and as a group, analysts' average price target represents an upside of 14% from current levels. Despite their recent appreciation, shares of Avon still trade at a 21% discount to sale value parity while paying a modest dividend yield of 1.2%. The same can also be said about Diamond Foods, Inc. (NASDAQ:DMND), which offers massive value at a mere 0.36 times sales, so there may be still room for piggybacks to mimic Zimmerman here.
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