Warren Buffett

The HFRX Absolute Return Index, which measures the overall returns of the hedge fund industry, posted a negative return of 0.09% in 2015, which compares with a negative return of 0.73% delivered by the Standard and Poor’s 500 Index (or a 1.40% gain including dividends). The investment environment for hedge funds has changed significantly over the past several months, so one should expect hedge funds to beat the broader market in the upcoming years. Rising interest rates and high uncertainty in the equity market form the perfect environment for hedge funds in 2016 and beyond, creating opportunities that were difficult to achieve in the bull market (hedge funds are hedged after all). For those interested in hedge funds’ recent moves, this article discusses four filings submitted with the SEC by several widely-known hedge fund managers tracked by Insider Monkey.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see more details here).

Warren Buffett’s Berkshire Hathaway keeps buying more shares of Phillips 66 (NYSE:PSX). According to a freshly-filed Form 4, the acclaimed investor snapped up 1.74 million shares on Friday at a weighted average cost of $76.01, boosting his overall holding in the oil refiner to 65.68 million shares. As covered on Tuesday, Berkshire Hathaway bought 1.65 million shares of Phillips 66 last Thursday, so it would not be surprising to see Buffett purchase even more shares in the days ahead. The energy manufacturing and logistics company has seen its shares decline by 18% since the beginning of December, presumably because of the plummeting crude oil prices. Even so, the stock is up by 27% over the past year and trades at extremely attractive price-to-earnings ratios.

It is true that the company’s sales were pressured by low crude oil prices in 2015, but its bottom-line results greatly benefited from this outcome, especially in the oil refining segment. Phillips 66 (NYSE:PSX)’s refining revenue for the nine months that ended September 30 accounted for only 23% of the company’s total revenue, whereas the net income generated from this segment accounted for a whopping 60% of the total bottom-line figure. Although refining revenue was down year-over-year, the increased refining margins which were achieved thanks to the average market crude oil price declining by more than the average market gasoline price, had a very beneficial impact on the company’s financial performance. A total of 33 hedgies tracked by Insider Monkey had stakes in the company at the end of the third quarter, accumulating 16.30% of its shares. Iridian Asset Management, founded by David Cohen and Harold Levy, cut its stake in Phillips 66 (NYSE:PSX) by 4% during the September quarter to 5.22 million shares.

Warren Buffett
Warren Buffett
Berkshire Hathaway

The next two pages of this article discuss three other filings submitted with the SEC recently.

As stated in a freshly-amended 13D filing, Clint D. Carlson’s Carlson Capital L.P. currently owns 2.27 million shares of Vitamin Shoppe Inc. (NYSE:VSI), which account for 7.79% of the company’s outstanding common stock. This compares with the 1.95 million-share position disclosed through the fund’s 13F filing for the third quarter. The 13D filing also discloses that Vitamin Shoppe and Carlson Capital entered into an agreement under which the company is set to add two new independent directors to its Board of Directors (currently comprised of ten members) over the next 60-to-90 days. The multi-channel specialty retailer and manufacturer of nutritional products will propose one candidate, while Clint Carlson’s investment firm will propose the second one. Moreover, the company’s Board size will decrease back to ten members immediately following the 2016 Annual Meeting of Shareholders.

A contract manufacturer of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products, Vitamin Shoppe might have a great future lined up, considering the changing consumer attitudes and preferences towards functional foods and natural health products. U.S consumer spending, which has been improving as a result of the tightening labor market, has a material impact on Vitamin Shoppe Inc. (NYSE:VSI)’s financial performance. The company posted net sales of $973.06 million for the nine months that ended September 26, up from $922.96 million reported for the same period of the prior year. Vitamin Shoppe’s gross margins as a percent of net sales reached 33.7% for the first nine months of 2015, up from 33.6% reported a year earlier. Considering that the stock is down by 22% over the past year, trades at an attractive forward price-to-earnings ratio of 13.32 (the forward P/E for the S&P 500 totals 15.75), and has an additional catalyst in the form of shareholder activism, the company might represent an attractive investment opportunity at the moment. Ken Griffin’s Citadel Advisors LLC trimmed its position in Vitamin Shoppe Inc. (NYSE:VSI) during the third quarter to 1.25 million shares.

Clint Carlson
Clint Carlson
Carlson Capital

In a Schedule 13G filing, Hal Mintz’s Sabby Management LLC reported owning 1.52 million shares of Zogenix Inc. (NASDAQ:ZGNX), which account for 6.13% of the company’s shares. The fund’s initial 13G on the company, which was submitted in March 2015, disclosed an ownership stake of 9.90 million shares (before the company completed a 1-for-8 reverse split of its common stock). The shares of the pharmaceutical company, which develops and commercializes central nervous system therapies, are in positive territory for the past one-year period. In the middle of December, Zogenix Inc. (NASDAQ:ZGNX) announced that the FDA had accepted the company’s investigational new drug (IND) application for its lead product candidate, ZX008, for the treatment of Dravet syndrome. The number of hedge funds from our database with positions in the company increased to 25 from 15 during the September quarter. These 25 funds amassed 47.60% of the company’s outstanding shares. Peter Kolchinsky’s RA Capital Management acquired a new stake of 1.68 million shares in Zogenix Inc. (NASDAQ:ZGNX) during the July-to-September period.

Hal Mintz
Hal Mintz
Sabby Capital

According to a separate 13G filing, Sabby Management LLC ceased to be the beneficial owner of more than 5% of the stock of Invivo Therapeutics Holdings Corp (NASDAQ:NVIV). The investment firm currently owns 507,100 shares of the company, representing 1.85% of its outstanding common stock. The initial 13G filing on the research and clinical-stage biomaterials and biotechnology company, filed in January 2015, revealed a stake of 7.75 million shares (before the company conducted a 1-for-4 reverse stock split), which accounted for 7.63% of its shares. Invivo Therapeutics Holdings Corp (NASDAQ:NVIV) primarily focuses on the treatment of spinal cord injuries, while its investigational degradable polymer Neuro-Spinal Scaffold is currently being studied in a pilot study for the treatment of complete traumatic acute spinal cord injury. A mere four hedge funds tracked by our team have positions in the company as of the end of the third quarter. Let’s not forget to mention that the stock is down by 24% over the past year, after embarking on a steady downtrend in late July.

Disclosure: None