Investor Letter Reveals John Burbank Beat the Market in September; Take a Look at His Top Picks

John Burbank‘s Passport Capital managed to perform much better than many of its peers due to its short exposure. In its September letter to investors, Passport revealed a return of 2.8% for its Global Strategy in September and 18% gains on a year-to-date basis. This compares with losses of 3.6% and 2.5% registered by the MSCI AC World and the S&P 500, respectively, in September, in addition to their year-to-date declines of 6.6% and 5.3%, respectively. Passport Capital ended September with a net exposure of -16% with 78% short and 57% long. On the long side of its portfolio, five stocks ranked as the top contributors at the end of September and we are going to take a closer look at them in this article.

Why are we interested in the stocks in which John Burbank prefers to invest? The reason is simple, we believe that imitating investors like Burbank can help us identify profitable opportunities among the thousands of companies that are trading on the market. By identifying stocks that the 730+ funds from our database are collectively bullish on, we can beat the market by as much as over ten percentage points annually. The key is to focus on their most popular small-cap picks. Our strategy follows the 15 most popular small-caps among hedge funds and it has returned 102% since August 2012, beating the market by 53 percentage points (see more details here).

Passport had exposure of 7% to CF Industries Holdings, Inc. (NYSE:CF) in its portfolio at the end of September, while in its most recent 13F filing (for the end of June), the fund revealed ownership of 4.18 million shares of the company. The stock lost 29% in the third quarter and plunged by 9% yesterday on the back of lower-than-expected financial results for the third quarter. CF Industries Holdings, Inc. (NYSE:CF) posted earnings of $0.39 per share, well below the $0.73 expected by analysts, on revenue of $927.4 million, above analyst estimates of $887 million. The sentiment for the stock among the investors from our database is also weak, with the number of funds bullish on CF Industries Holdings, Inc. (NYSE:CF) declining by 13 to 47 during the second quarter, while in aggregate these funds held 3% of the company’s outstanding stock.

In utilities company Sempra Energy (NYSE:SRE), Passport did not disclose holding shares in its latest 13F filing, but in the letter, it revealed having 5% exposure to the company. In its latest earnings report, Sempra Energy (NYSE:SRE) reported EPS of $1.00, above the estimates of $0.88. The stock is down by 7% year-to-date and sports a dividend yield of 2.69%. Goldman Sachs put the stock on its ‘Conviction Buy’ list back in June with a $130 price target, and overall, most analysts rate the stock as a ‘Buy’. At the end of June, 33 funds among those that we track held 4% of Sempra Energy (NYSE:SRE)’s outstanding common stock.

The other top three holdings of Passport Capital are represented by SolarCity Corp (NASDAQ:SCTY), Vipshop Holdings Ltd – ADR (NYSE:VIPS), and NRG Energy Inc (NYSE:NRG) and we are going to discuss them in more detail on the following page.

The letter also revealed that John Burbank is shorting the energy sector, but he is bullish on renewables and SolarCity Corp (NASDAQ:SCTY) is one of his top picks, with Passport having 4% portfolio exposure to the stock. The investor held 2.84 million shares of the company at the end of June, and another stake in bonds underlying 4.0 million shares. SolarCity Corp (NASDAQ:SCTY)’s most recent financial results were mixed, with revenue of $113.86 million for the third quarter beating the estimates, but the net loss of $2.41 per share being $0.46 lower than expected. Short-seller Jim Chanos is shorting SolarCity and called the company a “subprime financing company” (see article).

To Vipshop Holdings Ltd – ADR (NYSE:VIPS), Passport has 4% exposure to the stock and disclosed holding 10.97 million shares in its 13F filing for the June quarter. The stock lost 24% in the third quarter, but is still over 8% in the green year-to-date and trades at around 27-times forward earnings while sporting a PEG ratio below 1.0. Vipshop gained more popularity among the investors from our database during the second quarter, as the number of funds with long positions in it went up to 54 from 48, while the aggregate value of their holdings was equal to 17% of the company’s stock at the end of June. Another investor bullish on Vipshop Holdings Ltd – ADR (NYSE:VIPS) is John Horseman‘s Horseman Capital Management, which owns a stake of 1.57 million shares as of the end of September.

NRG Energy Inc (NYSE:NRG) is another top utilities pick of John Burbank. At the end of September, Passport had 4% portfolio exposure to the company, while a quarter earlier, it owned 8.82 million shares, having added 6.73 million shares between July and September. The stock lost almost 35% in the third quarter and is down by nearly 50% year-to-date. Among the funds we track, 31 reported long positions in NRG Energy Inc (NYSE:NRG) as of the end of June, holding in aggregate 14% of the company’s outstanding stock.

Disclosure: None