Gifford Combs‘ Dalton Investments is a savvy firm. AsiaHedge named Combs’ fund the Management Firm of the Year in 2012 for having the best risk-adjusted returns among its peers. Given that Dalton Investments recently filed its 13F for the third quarter reporting period, let’s take a closer look at the firm’s top picks heading into the fourth quarter, which are Berkshire Hathaway Inc. (NYSE:BRK.B), Micron Technology, Inc. (NASDAQ:MU), Turquoise Hill Resources Ltd (NYSE:TRQ), Eros International plc (NYSE:EROS), and American International Group Inc (NYSE:AIG).
First a little about ourselves. We at Insider Monkey track smart money investing activity. Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk-adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
#5 American International Group Inc (NYSE:AIG)
Shares held (as of September 30): 205,852
Total Value (as of September 30): $11.7 million
Percent of Portfolio (as of September 30): 5.89%
American International Group Inc (NYSE:AIG) has come a long way from the great recession. After paying off the government and divesting various non-core assets, American International Group is now solidly profitable. Given the strong U.S economy and soon-to-be normalizing interest rates, profits should rise as the insurer realizes more returns on its investments. Given the better times, American International Group could use its added cash flow to buy back shares on the cheap. Despite the 10.41% year-to-date rally, American International Group trades for only 0.78-times book value. John Paulson‘s Paulson & Co and Bruce Berkowitz’s Fairholme were among the elite investment firms long AIG at the end of the second quarter.
#4 Eros International plc (NYSE:EROS)
Shares held (as of September 30): 859,054
Total Value (as of September 30): $23.36 million
Percent of Portfolio (as of September 30): 11.76%
Eros International plc (NYSE:EROS), a leading company in the Indian film entertainment industry, is down by 30.77% year-to-date on accounting concerns. Wells Fargo analyst Eric Katz said, “we still don’t know the largest content buyers driving this increase, and we aren’t fully comfortable with the fact nearly half of the revenue originates outside of India”. The company needs to do a better job being transparent with its revenue streams. Investors are unlikely to get excited about the stock until the company clears the air over the issue.
#3 Turquoise Hill Resources Ltd (NYSE:TRQ)
Shares held (as of September 30): 11.62 million
Total Value (as of September 30): $29.64 million
Percent of Portfolio (as of September 30): 14.92%
Turquoise Hill Resources Ltd (NYSE:TRQ) is down by 2.26% year-to-date as lower commodity prices weigh on the company’s bottom line. The Chinese economy is slowing and reducing demand for the gold and copper that Turquoise Hill Resources Ltd produces in its giant Oyu Tolgoi mine in Mongolia. Demand for commodities will eventually bounce back, although Turquoise Hill Resources Ltd might not be around that long, however, as CIBC World Markets analyst Tom Meyer thinks Rio Tinto plc (ADR) (NYSE:RIO) will ‘almost certainly’ acquire 100% of the company one day. The question is when and at what price. Rio Tinto currently owns more than half of the company.