Bets on Herbalife Ltd. (HLF) and Argentina Pay Off Big for Special Situations-Focused Fund

When it comes to hedge funds, big media outlets generally cover only the big names like Bill Ackman, Carl Icahn, and George Soros. And it makes sense; these names have a long record of investing in the market and have even been involved in activist campaigns and proxy fights that can change the course of a large company’s operations. For example, Icahn played a crucial role in a number of spin-offs, including at Xerox Corp (NYSE:XRX), eBay Inc (NASDAQ:EBAY) and Hertz Global Holdings, Inc (NYSE:HTZ), to name a few. Ackman is currently on a crusade to prove that Herbalife Ltd. (NYSE:HLF) is a pyramid scheme, while George Soros, aside from his reputation as a great investor, is also considered the embodiment of evil by most anti-liberals in Central and Eastern Europe.

However, following big funds and trying to imitate their stock picks is unlikely to be a good strategy for a smaller investor. Some of these funds are conservative in their approach and prefer to put their money into big companies with solid financials and well-established business models that provide minimum risk, but their returns are pretty modest as a result. And while there’s nothing wrong with investing conservatively, small investors don’t really have the resources to benefit from this strategy.

So, what should one do? The obvious solution is to research a lot of stocks, then identify those that provide the optimal level of return in exchange for the level of risk that one can take. However, there are thousands of companies trading daily on stock exchanges and it can be difficult to identify the profitable bets. This is why looking at stocks that smart money likes to buy is very useful. However, the key is not to look at all big funds, but at smaller funds that are often flying under the radar. Those funds often score big, but barely anybody has heard about them.

This is where we come in. At Insider Monkey we follow over 700 different hedge funds and other institutional investors. Through analyzing their stock picks revealed in quarterly 13F filings, we identify a number of stocks that we share with our subscribers in premium newsletters. Our flagship strategy generated a return of 44.2% since February 2016, beating the S&P 500 ETF (SPY)’s 30% gain. Our previous batch of stock picks, released in February, have already outperformed the broader indexes by 5 percentage points in three months and we have recently shared our May picks with our subscribers, which you still have time to get in on by accessing this link. We also currently have a limited-time offer of a 14-day money back guarantee, so you have nothing to lose.

Among the funds that we follow, many are generating great returns, but either because of their size or because they were launched not overly long ago, they are usually unknown. One of these funds is Sarissa Capital Management, whose stock picks returned 200% in the last year (see some of its stock picks here). Another one is Serengeti Asset Management, which is already 27% in the green year-to-date, according to our calculations, and in this article, we are going to take a closer look at some of its winning bets, beginning on the next page.

First, let’s introduce the fund. Serengeti Asset Management was founded in 2007 by Jodi LaNasa, an alumnus of Goldman Sachs. The fund has around $2 billion in assets under management and invests mainly in special event situations and distressed debt. In its latest 13F filing, Serengeti disclosed an equity portfolio worth $514.40 million as of the end of March. The portfolio is fairly concentrated, with 20 positions, of which 13 are long investments.

One of the reasons why Serengeti’s stock picks managed to score a return of 27% in Q1 is that it invested in a number of Argentinian companies and rode the wave as the country elected a new President and started to show signs of improvement in its economy. Being ruled over for almost a decade by leftist populist Cristina Fernandez de Kirchner and her late husband Nestor Kirchner, Argentina plunged into a recession and was dominated by corruption. The new President, Mauricio Macri has managed to pull the country back from recession, but there are still many challenges, the biggest of which is the country’s monumental inflation of 40%. Nevertheless, the Argentine economy is expected to grow at around 2.7% in 2017.

The optimism surrounding the country’s economy has reflected on the performance of the US-listed stocks of Argentina-based companies, including two companies from Serengeti’s equity portfolio: Pampa Energia S.A. (ADR) (NYSE:PAM) and Irsa Inversiones y Rprsntcins SA (ADR) (NYSE:IRS). Another big winner in the fund’s portfolio is Herbalife Ltd. (NYSE:HLF), which is currently in activist Bill Ackman’s cross-hairs. Let’s take a closer look at the companies in question.

Pampa Energia S.A. (ADR) (NYSE:PAM) represented Serengeti’s second-largest position in terms of value at the end of March. The fund inched up its stake by 4% to 650,000 shares worth $35.24 million. The stock of the Argentina-based electricity company has surged by over 71% year-to-date. Earlier this month, the company reported consolidated sales of 15,166 Argentine peso ($946.99 million) for the first quarter, which represented an increase of 152% on the year, while its EPS surged to 0.98 Argentine peso ($0.06) from 0.35 ($0.02). Among the funds we track, the largest shareholder of Pampa Energia S.A. (ADR) (NYSE:PAM) is Zach Schreiber’s Point State Capital, which disclosed ownership of 5.07 million shares in its latest 13F filing.

On the next page, we’ll discuss two other investments from Serengeti’s equity portfolio that have boosted its returns.

Then there is Irsa Inversiones y Rprsntcins SA (ADR) (NYSE:IRS), in which Serengeti Asset Management held 1.10 million shares worth $26.96 million heading into the second quarter; the fund unloaded 87,000 shares during the first three months of the year. IRSA Inversiones y Representaciones SA is another Argentina-headquartered holding company that invests in a variety of businesses around the world. Among its holdings is Israeli telecom Cellcom, some real estate projects in Las Vegas, and Clal Insurance, which provides insurance and pensions in Israel. Irsa Inversiones y Rprsntcins SA (ADR) (NYSE:IRS)’s stock is 37% in the green year-to-date and has gained over 70% over the last year. During the second-half of 2016, Irsa Inversiones y Rprsntcins SA (ADR) (NYSE:IRS)’s revenue increased by more than tenfold to 36.83 billion Argentine peso ($2.30 billion) from 2.16 billion Argentine peso ($134.23 million) recorded a year earlier. In addition, the company turned to a profit of 3.57 Argentine peso ($0.22) per diluted share from a loss of 0.84 ($0.05). Another investor bullish on Irsa Inversiones y Rprsntcins SA (ADR) (NYSE:IRS) is billionaire Paul Singer’s Elliott Management, which held 520,986 shares at the end of March.

Last but not least, we would like to point out Serengeti’s stake in Herbalife Ltd. (NYSE:HLF), the largest weight loss company in terms of revenue. During the first-quarter, Serengeti added 100,000 shares to its stake in the company, disclosing a holding of 300,000 shares worth $17.44 million. Serengeti also owns some of Herbalife’s debt worth $23 million. Despite the company’s recent issues with the Federal Trade Commission and Ackman’s campaign to convince other investors that Herbalife Ltd. (NYSE:HLF) is a pyramid scheme and its stock is worthless, the shares have been doing pretty well, having gained 49% year-to-date. Serengeti added the company to its equity portfolio during the first-quarter of 2015 and the stock has rallied by 66.34% since then. The company’s latest financial report was pretty good, with both revenue and EPS beating expectations, though Ackman, who has a big short bet against the company, has recently said that Herbalife Ltd. (NYSE:HLF)’s fundamentals are worse than the company makes them look. On the other hand, Ackman’s “rival” in the whole Herbalife Ltd. (NYSE:HLF) story, Carl Icahn is pretty confident in the company, as his fund, Icahn Capital, held 22.87 million Herbalife shares at the end of the first-quarter.

Disclosure: None