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Billionarie Dubin’s Mid-Cap Picks Characterized By Lawsuits, Exchange Rates

New York-based hedge fund Highbridge Capital Management LLC was co-founded in 1992 by billionaire Glenn Russell Dubin and his former classmate Henry Swieca. Swieca left the firm in 2009, while Dubin remains the CEO and chairman of the hedge fund. As of March 31, Dubin’s public equity portfolio worth $7.25 billion was primarily split among three sectors: healthcare, consumer discretionary, and technology. According to his firm’s latest 13F filing, the fund added 699 new stocks to its massive portfolio during the quarter, while increasing its stakes in 282 other positions. However we are going to take a closer look at three specific stocks of Dubin’s; his top mid-cap picks (stocks with market caps between $10 billion and $20 billion). Those stocks are Tyson Foods, Inc. (NYSE:TSN), Ralph Lauren Corp (NYSE:RL) and Regions Financial Corp (NYSE:RF).

HIGHBRIDGE CAPITAL MANAGEMENT

Hedge funds and other big money managers like Dubin tend to have the largest amounts of their capital invested in large and mega-cap stocks like Gilead Sciences, Inc. (NASDAQ:GILD) because these companies allow for much greater capital allocation. That’s why if we take a look at the most popular stocks among funds, we won’t find any mid- or small-cap stocks there. However, our backtests of hedge funds’ equity portfolios between 1999 and 2012 revealed that the 50 most popular stocks among hedge funds underperformed the market by seven basis points per month, showing that their most popular picks and the ones that received the bulk of their capital were not actually their best picks. On the other hand, their top small-cap picks performed considerably better, outperforming the market by 95 basis points per month. This was confirmed through backtesting and in forward tests of our small-cap strategy since August 2012. The strategy, which involves imitating the 15 most popular small-cap picks among hedge funds has provided gains of more than 142%, beating the broader market by over 83 percentage points through the end of April (see the details).

Glenn Russell Dubin
Glenn Russell Dubin
Highbridge Capital Management

We’ll start with food processor Tyson Foods, Inc. (NYSE:TSN), in which Dubin increased his stake by 3% to a total of 1.70 million shares with a value of $64.77 million. The Arkansas-based company has bounced between $37.00 and $44.00 this spring and is currently up by over 7% year-to-date. Tyson Foods posted earnings per share for the first quarter of $0.75, beating the analysts’ estimates by $0.02. Analysts are now expecting $0.95 in earnings per share for the second quarter, ending on June 30. Tyson Foods, Inc. (NYSE:TSN) is also involved in a lawsuit, known as the “Donning-Doffing case”, in which workers are suing Tyson Foods for not paying them accordingly. The Supreme Court announced last week that it is now granting the case a review, so for the time being, it’s far too early to speculate about any possible financial impact. Instead we will note that Dinakar Singh, representing TPG-Axon Management took a stake of 3.70 million shares with a value of $141.77 million and representing 9.94% of its public equity portfolio in Tyson Foods during the first quarter.

Next up is Dubin’s financial pick, as he increased his stake Regions Financial Corp (NYSE:RF) by 62% to 6.57 million shares with a value of $62.07 million. Birmingham, Alabama-based Regions Financial has experienced a slow spring on the stock exchange, being down slightly year-to-date. The bank, which started its operations back in 1971 as a result of a merger between three local banks, posted its earnings of $0.16 for the first quarter on April 21, which was $0.02 below analysts’ expectations. For the same period the year before, Regions Financial Corp (NYSE:RF) posted earnings of $0.21. The revenue for the first quarter was however slightly higher than the revenue for the first quarter of 2014, giving some support to the share price. In the later part of May, Regions Financial finally put an end to the lawsuit the bank had been engaged in regarding the acquisition of AmSouth Bancorp back in 2006. Regions Financial has now agreed to pay shareholders $90 million as compensation for the misleading and false information the bank revealed regarding the purchase. The compensation is assumed by analysts to affect the banks financial situation. Believing that this is already baked into the share price it would seem is Dmitry Balyasny, who increased his fund’s stake in Regions Financial by 1,293% to 9.70 million shares with a value of $91.56 million during the first quarter.

The last pick to be discussed is the 426,310 shares with a value of $56.06 million that Highbridge bought in designing company Ralph Lauren Corporation (NYSE:RL). Started by fashion designer Ralph Lauren in 1967 and put on the stock exchange thirty years later in 1997, the company has been having a terrible spring on the exchange, dipping by over 24% year-to-date. The reporting of its financial results for the third quarter of 2015 led to one of the worst trading days in the stock’s history as it plunged by 18%. The results were heavily affected by exchange rates, leading to Ralph Lauren Corp saying that it was going to increase its prices in Europe, Japan, and Canada in order to offset the strong appreciation of the U.S dollar. Ralph Lauren Corporation (NYSE:RL) also stated that it was about to renegotiate the price of the raw materials that it uses in its products, like cotton. Ralph Lauren posted earnings per share of $1.41 for the fourth quarter of 2015 $0.09 better than analysts’ estimates, with revenues also coming in better than expected, showing that Ralph Lauren seems to have found a way to quickly counter the unfavorable exchange rates, as it set out to do. David Goel and Paul Ferri‘s Matrix Capital Management took a stake in Ralph Lauren Corp consisting of 400,000 shares with a value of $52.60 million during the first quarter, and seemed to be confident in the turnaround that has seemingly already begun.

Disclosure: None

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