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John Shapiro’s Value Investing Picks Pay Off Big Time In First Quarter

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John Shapiro‘s equity holdings for his fund Chieftain Capital delivered an outstanding 10% weighted average return for the first quarter of 2015. Although the above metric takes into account all the 10 equity holdings of Chieftain, according to the latest 13F filing, it doesn’t include other financial instruments that the hedge fund is not required to publicly disclose. This could in effect significantly change Chieftain’s actual returns from our estimates.

Express Scripts Holding Company

Shapiro founded Chieftain Capital in 2010 after the original firm, Chieftain Capital, had to be dismantled owing to differences with its co-founder, Glenn Greenberg. What remains more or less the same are the pillars of the firm’s investment philosophy. Some of these are as follows: no holding should represent less than 5% of the portfolio value, new companies are usually avoided even though they might offer considerable growth prospects, since the chance of them disappearing altogether is very real, and businesses with a low market valuation are sought, so in future they have a greater chance to outgrow the market. Key performers of Chieftain’s portfolio for the first quarter were: Express Scripts Holding Company (NASDAQ:ESRX), Hanesbrands Inc. (NYSE:HBI), Sensata Technologies Holding N.V. (NYSE:ST), UnitedHealth Group Inc. (NYSE:UNH), and American International Group Inc (NYSE:AIG).

Most investors don’t have enough time to do in-depth analysis on each stock that they want to include in their portfolios. Professional investors, like John Shapiro, spend weeks conducting due diligence on each company and spend a lot of money on obtaining information and paying the salaries of Ivy League-educated analysts. That’s why we have always believed that imitating the stock picks of hedge funds and billionaire investors is an excellent shortcut we can take. It doesn’t cost an arm and a leg either. We analyzed the historical stock picks of these investors and our research revealed that the small cap picks of hedge funds performed better than the market and their large-cap picks. A portfolio of 15 most popular small caps among several hedge funds outperformed the S&P 500 Total Return Index by 95 basis points per month between 1999 and 2012. The exceptional results of this strategy got even better in the forward tests we have been conducting since the end of August 2012. The most popular small-cap stocks among hedge funds beat the market by more than 79 percentage points since then, returning more than 132% (see the details here).

Shapiro added Express Scripts Holding Company (NASDAQ:ESRX) to Chieftain’s equity portfolio during the second quarter of 2013 by acquiring about 3.55 million shares. The holding  was increased over the following year, but was slashed by 35% in the fourth quarter of 2014 to 3.50 million shares valued at $296.28 million. The stock posted a 2.48% return in the first quarter of the current year. Express Scripts Holding Company (NASDAQ:ESRX) is focused on reducing the prescription related waste arising from factors such as costly drugs. According to the pharmacy benefit management, this waste in resources amounts to hundreds of billions of dollars every year. In this regard the company has been trying to break the hold of Gilead Sciences, Inc. (NASDAQ:GILD)’s expensive treatment for hepatitis C with AbbVie Inc (NYSE:ABBV)’s cheaper one. Among the funds that we track, Robert Rodriguez and Steven Romick’s First Pacific Advisors LLC held the largest stake in Express Scripts Holding Company (NASDAQ:ESRX) with 4.50 million shares valued at $380.62 million.

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