Should You Follow This Investor Into His Top Picks?

Selz Capital LLC is a New York-based hedge fund with an equity portfolio of $362 million as of September 30, and has been managed by Bernard T. Selz since 2003. The fund offers investment advisory services regarding security portfolios of individuals, as well as small businesses. Given that Selz Capital has recently filed its 13F for the third quarter, let’s take a closer look at the fund’s favorite picks heading into the fourth quarter, which include Macquarie Infrastructure Corp (NYSE:MIC), Air Lease Corp (NYSE:AL), Magellan Midstream Partners, L.P. (NYSE:MMP), Kinder Morgan Inc (NYSE:KMI), and Gilead Sciences, Inc. (NASDAQ:GILD).

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 ETF (SPY) by around 53 percentage points (see more details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

#5 Gilead Sciences, Inc. (NASDAQ:GILD)

Shares held (as of September 30): 130,000
Total Value (as of September 30): $12.77 million
Percent of Portfolio (as of September 30): 3.52%

Although Selz Capital trimmed its holding by 50,000 shares during the third quarter, the fund still owns 130,000 shares worth $12.77 million as of the end of September. Gilead Sciences, Inc. (NASDAQ:GILD)’s Sovaldi and Harvoni are some of the best selling drugs on the market, and will provide the company with substantial cash flow to buy back shares or pay higher dividends. Shares trade at a discount valuation of just 8.81 times forward earnings and are up 8.67% year-to-date. Analysts have a consensus price target of $124.63 per share, giving the stock 22.59% upside. Among the funds we track,  D. E. Shaw held 4.39 million shares at the end of June.

#4 Kinder Morgan Inc (NYSE:KMI)

Shares held (as of September 30): 808,211
Total Value (as of September 30): $22.37 million
Percent of Portfolio (as of September 30): 6.17%

Kinder Morgan Inc (NYSE:KMI)’s stock is down 21.79% year-to-date because of low crude prices. Investors fear the low prices will cause less oil to flow through Kinder Morgan’s pipes, thus lowering the company’s revenue and cash flow. This fear has so far been unwarranted, however, as Kinder Morgan’s fundamentals have remained strong. The company is still growing and estimates that its already attractive dividend yield of 6.14% could grow by an annual 10% for another five years. Saudi Arabia might be succeeding in stifling smaller E&Ps, but it can’t stifle Kinder Morgan. In the previous round of 13F filings, Bob Peck And Andy Raab‘s FPR Partners reported ownership of 4.91 million shares of Kinder Morgan.

#3 Magellan Midstream Partners, L.P. (NYSE:MMP)

Shares held (as of September 30): 434,650
Total Value (as of September 30): $26.13 million
Percent of Portfolio (as of September 30): 7.21%

Shares of Magellan Midstream Partners, L.P. (NYSE:MMP) have declined by 16.1% year-to-date as low crude prices and higher Treasury yields weigh on the MLP. With a dividend yield of 4.39%, the market is saying that Magellan Midstream Partners LP’s dividend is safe. It shouldn’t come as a surprise to any Magellan Midstream Partners, L.P. (NYSE:MMP) shareholders, as the stock has one of the strongest coverage ratios in the midstream sector. With a long term debt to trailing 12-month EBITDA ratio of just 3, Magellan Midstream Partners is also one of the least leveraged companies. Among the investors from our database, John Osterweis‘ Osterweis Capital Management owns 1.19 million shares as of the end of June.

#2 Air Lease Corp (NYSE:AL)

Shares held (as of September 30): 944,900
Total Value (as of September 30): $29.22 million
Percent of Portfolio (as of September 30): 8.06%

Air Lease Corp (NYSE:AL), which purchases and leases commercial aircraft to airlines worldwide, has beaten analyst revenue and earnings estimates every quarter this year as airlines have more money to spend because of low jet fuel prices. Other hedge funds are for the most part bullish on Air Lease, with 29 investors (out of the 730 that we track) reporting stakes worth a cumulative $494.93 million or 14.2% of the float as of the end of June. Shares are down 2.75% year-to-date, but trade at a forward P/E of 9.97. Another shareholder of Air Lease is Peter Adam Hochfelder‘s Brahman Capital, which held 4.56 million shares at the end of the second quarter.

#1 Macquarie Infrastructure Corp (NYSE:MIC)

Shares held (as of September 30): 999,703
Total Value (as of September 30): $74.64 million
Percent of Portfolio (as of September 30): 20.59%

At 20.59% of the equity portfolio, Macquarie Infrastructure Corp (NYSE:MIC) is Selz Capital’s top pick and for many good reasons. The company’s free cash flow growth is on track and given the energy downturn, Macquarie Infrastructure has the opportunity to pick up energy infrastructure assets on the cheap. A REIT spin-off of International-Matex Tank Terminals, which owns and operates bulk liquid storage terminal facilities, is also not out of the question. Macquarie’s dividend is secure and growing, as the management reaffirmed the company’s dividend growth guidance ‘of at least 14% in each of 2015 and 2016, making the stock’s already attractive 5.6% dividend yield even more so.

 

Disclosure: none