Moving On From Valeant’s Drop: Hedge Funds Like These Five Stocks With Great Q1 Returns

While a lot has been discussed and written about stocks like Valeant Pharmaceuticals Intl Inc (NYSE:VRX) that have burned hedge funds this year, there has been very little to no coverage on stocks backed by smart money that have performed really well this year. Since bad news and events usually get more viewership and hence more coverage than good ones, it’s understandable why Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Sunedison Inc (NYSE:SUNE), along with the funds which had a large stake in them like Pershing Square and Greenlight Capital have been constantly in the news. However, what is surprising is that not many people know about  some stocks that are performing well this year or the funds that were bullish on them. We compiled a list of five stocks that enjoyed a significant level of support fro the funds we track heading into 2016 and have registered strong gains over 44%  during the first quarter of 2016. Even though due to the results, these stocks may not represent good bargains at current levels, they emphasize why it is important to pay attention what hedge funds are buying.

We track prominent investors and hedge funds 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 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Kate Spade & Co (NYSE:KATE)

– Investors With Long Positions (as of December 31): 36

– Aggregate Value of Investors’ Holdings (as of December 31): $462.97 million

Let’s start with apparel and accessory maker Kate Spade & Co (NYSE:KATE). During the fourth quarter of 2015, the ownership of the company among funds covered by us increased by eight, but the aggregate value of their holdings in it saw a decline of 12.5%. Investors which initiated a stake in the company during that period included Robert Joseph Caruso‘s Select Equity Group, which bought nearly 1.2 million shares of the company. Kate Spade & Co (NYSE:KATE)’s stock started growing in mid-February in anticipation of the company’s fourth-quarter results and rallied after the company reported mixed results, but issued better-than-expected guidance on full-year comps. Since the stock has already appreciated by 44% in the first quarter, most analysts don’t think that it is a bargain at current levels. However, they also feel that the stock has little downside risk at current levels because the company has little exposure to China when compared to its peers. On March 3, analysts at Barclays reiterated their ‘Overweight’ rating on the stock and raised it to $28 from $23.

#4 Ellie Mae Inc (NYSE:ELLI)

– Investors With Long Positions (as of December 31): 28

– Aggregate Value of Investors’ Holdings (as of December 31): $349.41 million

The number investors with long positions in Ellie Mae Inc (NYSE:ELLI) inched up by one and the aggregate value of their holdings in it swelled by 28% during the fourth quarter. Among the funds bullish on the company going into 2016 was Brett Barakett‘s Tremblant Capital, which increased its stake in the on-demand software solutions company by 50% to 1.14 million shares during the October-December period. Ellie Mae Inc (NYSE:ELLI)’s stock suffered a 20% decline in early-February after Tableau Software Inc (NYSE:DATA) and LinkedIn Corp (NYSE:LNKD) reported their quarterly results, but quickly bounced back after the company reported its own figures on February 11. Owing largely to that rally, the stock ended the first quarter of 2016 50.5% in the green. Some analysts who track Ellie Mae currently are concerned about the rising gap between the company’s GAAP and non-GAAP earnings, which they equate to stock-based executive compensation, and also the large quantity of shares sold by the company’s insiders in the past few quarters.