Leighton Welch‘s Welch Capital Partners is a long/short hedge fund which uses fundamental valuation to analyze stocks, and which has a focus on healthcare, technology, energy, and industrial companies. According to the firm, Leighton Welch directs a “cash flow driven investment strategy with a top down macro overlay,” and has a public equity portfolio worth $294.15 million as of September 30. Given that Welch Capital Partners just filed its 13F, let’s take a closer look at the fund’s top stock picks of Oracle Corporation (NYSE:ORCL), Envision Healthcare Holdings Inc (NYSE:EVHC), Citigroup Inc (NYSE:C), Zimmer Biomet Holdings Inc (NYSE:ZBH), and Blackstone Group LP (NYSE:BX), to see the stocks that its research and analysis has determined are strong candidates for outperformance.
Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 53 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. a 48.7% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).
#5 Citigroup Inc (NYSE:C)
Shares held (as of September 30): 296,502
Total Value (as of September 30): $14.71 million
Percent of Portfolio (as of September 30): 5.00%
Citigroup Inc (NYSE:C) recently reported third quarter earnings of $1.31 per share on revenues of $18.5 billion, which beat profit estimates by $0.03 per share but missed revenue expectations by $40 million. ‘Bad bank’ Citi Holdings was profitable, with an adjusted quarterly net income of $47 million and adjusted revenues of $1.44 billion. Citigroup also repurchased 36 million shares in the third quarter. Like other banks, Citigroup shares sold off a few months ago because of weak sentiment, but with a price-to-book ratio of 0.78, at some point, the market will realize the strong dollar will not be permanent, and will give Citigroup a higher valuation. Seth Klarman‘s Baupost Group owned 102.55 million Citigroup shares at the end of June.
#4 Envision Healthcare Holdings Inc (NYSE:EVHC)
Shares held (as of September 30): 402,020
Total Value (as of September 30): $14.79 million
Percent of Portfolio (as of September 30): 5.03%
Envision Healthcare Holdings Inc (NYSE:EVHC) is Welch Capital Partners’ fourth-largest position, good for 5.03% of its equity portfolio. Shares of the company, which provides outsourced medical services to consumers and hospitals, have retraced substantially in recent months after Community Health Systems (NYSE:CYH) released very lousy preliminary third quarter data due to weak volumes and lower-than-expected sales, caused by a deterioration in revenue payer mix. Investors worry Community Health Systems’ warning is a canary in the coal mine and that margins for the sector will contract in the near-term due to lower demand and a tightening labor market. Analysts are still optimistic, however, as they have a consensus price target of $40.27 on Envision’s stock, which indicates 43.37% upside.
The top three stock picks of Welch Capital Partners are disclosed on the second page.