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This Steven Cohen Protege Outperformed Most Hedge Funds In 2015; Here’s What He Is Bullish On In 2016

Melvin Capital Management is a New York-based long/short equity hedge fund founded by Gabriel Plotkin in December, 2014. Prior to founding Melvin Capital Management, Mr. Plotkin worked as an equities trader for eight years at billionaire Steven A. Cohen‘s now defunct hedge fund SAC Capital Advisors. Mr. Cohen was also among the first few investors who invested in Melvin Capital, which now boasts of assets under management (AUM) of over $2 billion. While he might have received his training and the seed money to start his fund from Mr. Cohen, Mr. Plotkin’s trading style is very different from his mentor. Instead of relying on gut feeling, he pays great attention to data and maintains discipline in his positions. Melvin Capital primarily invests in US consumer discretionary stocks and uses only a moderate amount of leverage to boost its returns.

According to Bloomberg’s recently released list of the best-performing hedge funds of 2015, Melvin Capital Management ranked on the second spot among hedge funds with AUM of over $1 billion. Bloomberg also revealed that amid a decline in the broader market in January, Melvin Capital Management was up by 2.9%. While Bloomberg reported that the fund generated returns of 47% in 2015, Insider Monkey’s analysis of Melvin Capital’s 13F holdings in companies worth over $1 billion shows that the 40 long positions held by the fund during the last year delivered a weighted average return of 15.2%. Since we don’t include a fund’s short positions or its investments in other asset classes apart from stocks, that explains why our estimates differ from the actual returns of the fund. However, our estimate provides a more accurate picture of a fund’s stock-picking skills. Keeping that in mind, in this article we will analyze Melvin Capital Management’s top five stock picks going into 2016 as revealed by its recently submitted 13F filing with the SEC.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. Our researched showed that imitating 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).

Gabriel Plotkin
Gabriel Plotkin
Melvin Capital Management

#5 Signet Jewelers Ltd. (NYSE:SIG)

– Shares Owned by Melvin Capital Management (as of December 31): 600,000

– Value of Holding (as of December 31): $74.21 million

Signet Jewelers Ltd. (NYSE:SIG) was a new addition to Melvin Capital Management’s equity portfolio during the fourth quarter. Shares of the jewelry retailing company have fallen by nearly 20% so far this year. However, analysts feel that this decline has made the stock attractive at the current levels since the revenue of the company is projected to grow for the next two years at a CAGR of 9.5% and it currently trades at a forward price-to-earnings multiple of only 12.38. For its fiscal 2016 fourth quarter, analysts are projecting the company to report EPS of $ 3.55 on revenue of $2.41 billion, compared to EPS of $3.06 on revenue of $2.28 billion it had delivered for the same quarter of the previous year. Keith Meister‘s Corvex Capital increased its stake in Signet Jewelers Ltd. (NYSE:SIG) by 12% to 5.63 million shares during the fourth quarter.

#4 Royal Caribbean Cruises Ltd (NYSE:RCL)

– Shares Owned by Melvin Capital Management (as of December 31): 740,000

– Value of Holding (as of December 31): $74.9 million

Amid a 13.6% rise in Royal Caribbean Cruises Ltd (NYSE:RCL)’s stock during the fourth quarter, Melvin Capital Management increased its stake in the company by 13%. Royal Caribbean Cruises Ltd (NYSE:RCL) has lost over one-fourth of its market capitalization so far this year with most of the decline coming prior to the company’s fourth quarter earnings release. While the Street had expected EPS of $0.94 on revenue of $1.96 billion, Royal Carribbean reported EPS of $0.96 on revenue of $1.90 billion for the quarter. Following the earnings release, analysts at Citigroup reiterated their ‘Buy’ rating on the stock, but lowered their price target to $87 from $110. John W. Rogers‘ Ariel Investments reduced its stake in the cruise company by 16% to almost 800,000 shares during the October-December period.

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#3 Domino’s Pizza, Inc. (NYSE:DPZ)

– Shares Owned by Melvin Capital Management (as of December 31): 725,000

– Value of Holding (as of December 31): $80.66 million

Domino’s Pizza, Inc. (NYSE:DPZ) jumped 10 spots and became Melvin Capital Management’s third largest equity holding at the end of December owing largely to the fund increasing its stake in it by 63% during the fourth quarter. The fund’s conviction on the stock is paying off in a this quarter as the shares of the company have skyrocketed in the past few days after it released its fourth quarter financial results and are trading up 20.2% year-to-date. For the quarter, Domino’s Pizza, Inc. (NYSE:DPZ) declared EPS of $1.15 on revenue of $741.20 million, beating analysts’ expectations of $1.11 and $706.77 million, respectively. After the results, several analysts raised their price target on the stock, including Jefferies Group, which raised the target to $125 from $102, but kept the rating at ‘Hold’. Steve Cohen’s Point72 Asset Management also increased its stake in the company by 132% to 378,900 shares during the fourth quarter.

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#2 Dollar Tree, Inc. (NASDAQ:DLTR)

– Shares Owned by Melvin Capital Management (as of December 31): 1.1 million

– Value of Holding (as of December 31): $85 million

Dollar Tree, Inc. (NASDAQ:DLTR) was another new addition to Melvin Capital Management’s equity portfolio during the fourth quarter. Due to a swift 10% rally since February 12, shares of Dollar Tree, Inc. (NASDAQ:DLTR) are currently trading up by 5.71% year-to-date. Taking cues from Wal-Mart Stores, Inc. (NYSE:WMT)’s recent earnings release, analysts don’t have high hopes from Dollar Tree when it reports its fourth-quarter results early next month. The consensus estimates currently include EPS of $1.07 on revenue of $5.41 billion for the quarter, which compares to EPS of $1.16 on revenue of $2.48 billion delivered for the same quarter of the previous year. On February 23, analysts at Buckingham Research initiated coverage on the stock with a ‘Buy’ rating and $96 price target. David Thomas‘ Atalan Capital also initiated a stake in the company during the fourth quarter by purchasing 194,000 shares.

#1 McDonald’s Corporation (NYSE:MCD)

– Shares Owned by Melvin Capital Management (as of December 31): 750,000

– Value of Holding (as of December 31): $88.6 million

Despite Melvin Capital Management reducing its stake in the company by 12% during the fourth quarter, McDonald’s Corporation (NYSE:MCD) emerged as the fund’s top stock pick going into 2016. Shares of McDonald’s Corporation (NYSE:MCD) witnessed a minor rally this year around the time it reported its results for the last quarter, but have given up those gains since then and are now trading flat year-to-date. However, the stock still sports an attractive annual dividend yield of over 3%. Though some analysts are concerned that the stock is overvalued, trading at a premium not seen since 1999, most of them believe that since the company’s turnaround initiatives seems to be working there is no imminent threat to its stock. On February 26, analysts at Goldman Sachs reiterated their ‘Neutral’ rating on the stock, while setting their price target at $110. With ownership of 11.9 million shares of the company, Jonathon Jacobson‘s Highfields Capital Management was the largest shareholder of the company at the end of December.

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Disclosure: None

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