Sanford J. Colen founded Apex Capital, a San Francisco-based long/short equity hedge fund, in 1995. Prior to founding Apex Capital, Mr. Colen served at Pacific Equity Management for nine years, under different designations which included acting variously as its CEO, COO, and portfolio manager. Apex Capital recently filed its 13F with the Securities and Exchange Commission (SEC) for the reporting period ending September 30. The filing revealed that the value of its U.S public equity portfolio at the end of the third quarter declined to $1.05 billion from $1.15 billion at the end of the second quarter. According to the filing, during the July-to-September period the fund made additional purchases in 15 stocks, reduced its holdings in 23 stocks, initiated a stake in 11 stocks and sold off its entire holdings in ten stocks. As of September 30, the top ten equity holdings of the fund accounted for 42.62% of the value of its equity portfolio and stocks from the consumer discretionary, healthcare, and information technology sectors each constituted 26% respectively of Apex’s equity portfolio. In this article we are going to take a closer look at Apex Capital’s top stock picks at the end of September.
Before we proceed to that, let’s first understand why we cover hedge fund activity. We track hedge funds and prominent investors 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 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated ten percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 53 percentage points (102% return vs. the S&P 500’s 49% gain) over the last 37 months (see the details here).
#5 Yelp Inc (NYSE:YELP)
Shares Owned by Apex Capital (as of September 30): 2.30 million shares
Value of Holding (as of September 30): $43.33 million
Even though Apex Capital increased its stake in Yelp Inc (NYSE:YELP) during the third quarter by 47% or 644,100 shares, the almost 50% decline that Yelp Inc (NYSE:YELP)’s shares suffered during the quarter resulted in the company being Apex Capital’s fifth-largest equity holding at the end of the third quarter, down from being the fund’s second-largest holding at the end of the second quarter. Shares of the internet company have slumped heavily in 2015 and currently trade down by almost 60% year-to-date. However, the stock is showing signs of having bottomed out over the past three months. After many disappointing quarters in a row, the company finally managed to report better-than-expected numbers on October 28 when it declared its results for the third quarter. EPS for the quarter came in at $0.03 on revenue of $143.60 million, compared to the EPS loss of $0.09 and revenue of $141.42 million that analysts were expecting. Ricky Sandler‘s Eminence Capital initiated a stake in Yelp during the second quarter, purchasing almost 1.7 million shares.
#4 Netflix, Inc. (NASDAQ:NFLX)
Shares Owned by Apex Capital (as of September 30): 499,700 shares
Value of Holding (as of September 30): $51.60 million
Just like Yelp, Netflix, Inc. (NASDAQ:NFLX) also dropped from being the largest equity holding of Apex Capital at the end of the second quarter to being the fourth-largest at the end of the third quarter. However, unlike Yelp, Netflix, Inc. (NASDAQ:NFLX) lost its position because Apex Capital sold 58% of its holding,or 692,750 shares of the company during the quarter. Since Apex Capital has held a stake in Netflix for many quarters and shares of Netflix are up by 121% year-to-date and by almost 1,000% in the past three years, it is obvious that the fund was sitting on terrific profits when it partially cashed out of its stake during the third quarter. After surprising analysts and investors quarter-after-quarter with spectacular results, the streaming giant wasn’t able to replicate that performance, reporting mixed results for the third quarter on October 14. While analysts were expecting EPS of $0.08 on revenue of $1.75 billion, the company reported EPS of $0.07 on revenue of $1.74 billion. Moreover, even though its overall subscriber growth continued to rise, the domestic growth of the company slowed during the third quarter, after two consecutive quarters of acceleration. Philippe Laffont‘s Coatue Management also reduced its stake in Netflix significantly during the second quarter, by 84% to 286,585 shares.
#3 Michael Kors Holdings Ltd (NYSE:KORS)
Shares Owned by Apex Capital (as of September 30): 1.26 million shares
Value of Holding (as of September 30): $53.14 million
Though Apex Capital reduced its stake in Michael Kors Holdings Ltd (NYSE:KORS) slightly, by 1% or 15,600 shares during the third quarter, the company continued to remain its third-largest equity holding at the end of September. Owing majorly to the continuous decline that the shares of the luxury lifestyle retailer saw during the first half of the year, the stock of Michael Kors Holdings Ltd (NYSE:KORS) currently trades down by 48.73% year-to-date. However, this significant decline has also contributed to the stock becoming lucrative from a valuation perspective, as it currently trades at 8.70-times its forward P/E ratio. The company is scheduled to report its third quarter earnings today and analysts expect it to report EPS of $0.89, $0.11 less than the EPS of $1.00 that it reported for the same quarter last year. Marc Majzner‘s Clearline Capital was one of the hedge funds that initiated a stake in the company during the second quarter; it held 582,220 shares of Michael Kors as of June 30.
#2 Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA)
Shares Owned by Apex Capital (as of September 30): 975,000 shares
Value of Holding (as of September 30): $55.05 million
Moving on, Apex Capital increased its stake in Israel-based pharmaceutical major Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) by 34% or 250,000 shares during the third quarter. In the past ten months, shares of Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) have witnessed high volatility and are currently trading relatively flat year-to-date, with gains of nearly 4%. On October 13, the company launched a generic version of GlaxoSmithKline plc (ADR) (NYSE:GSK)’s top-selling drug, Avodart. For the third quarter of fiscal 2015, the company declared better-than-expected results, reporting EPS of $1.35 on revenue of $4.80 billion, compared to analysts’ consensus estimate of EPS of $1.28 on revenue of $4.75 billion. Following the earnings release, on November 1, analysts at Canaccord Genuity reiterated their ‘Hold’ rating and $79 price target on the stock. Billionaire investor David E. Shaw‘s firm D.E. Shaw increased its stake in Teva Pharmaceutical by 90% to slightly above 3.24 million shares during the April-June period.
#1 Allergan PLC (NYSE:AGN)
Value of Holding (as of September 30): $61.16 million
Shares Owned by Apex Capital (as of September 30): 225,000 shares
Finally, the additional 28% or 50,000 shares that Apex Capital purchased of Allergan PLC (NYSE:AGN) (formerly Actavis PLC) ensured that even after suffering a 10% decline during the third quarter, the company ended up becoming Apex Capital’s largest equity holding at the end of September. On October 29, Allergan PLC (NYSE:AGN) confirmed that it is in “preliminary friendly discussions” with pharmaceutical behemoth Pfizer Inc. (NYSE:PFE) for a possible merger. If this merger does takes place, it would be the largest deal in the pharmaceutical industry’s history. Allergan PLC (NYSE:AGN) is scheduled to report its fiscal 2015 third quarter earnings on November 4 and analysts are expecting the company to report EPS of $4.46, slightly better than the EPS of $4.38 it reported for the second quarter. However, the revenue expectations from the company for the third quarter are same as in the second quarter, at $5.71 billion. Louis Navellier‘s Navellier & Associates sold 54,545 shares of Allergan PLC during the third quarter to bring its total holding in the company down to 91,886 shares as of September 30.