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Can Billionaire John Griffin’s Small-Cap Picks Beat the Market?

Today, we decided to analyze the profitability of the small-cap equity holdings of billionaire John Griffin‘s $13.8 billion Blue Ridge Capital. To get an overview of Griffin’s stock picking skills in the small-cap category, we backtested the returns of his top five small-cap (companies with a market-cap ranging from $1 billion to $5 billion) holdings between 1999 and 2012. The average value-weighted monthly returns of these holdings stood at 0.97%, compared to an average monthly return of 0.32% for the S&P 500 during this same period. These top five small-cap picks of Griffin also generated a strong average monthly alpha of 0.69%. With that track record of small-cap success in mind, let’s look at Griffin’s top small-caps as of March 31, which are Platform Specialty Products Corp (NYSE:PAH), MGIC Investment Corp. (NYSE:MTG), PBF Energy Inc (NYSE:PBF), Post Holdings Inc (NYSE:POST), and Kate Spade & Co (NYSE:KATE).

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Griffin learned the art of investment science from one of the great elder statesmen in the hedge fund industry, serving as second-in-command to veteran investor, Julian Robertson‘s Tiger Management. To get an idea of Griffin’s farsightedness we only need to look at his performance in the trying period of 2007-2009, when financial crises rocked the foundations of the modern financial system. Griffin smoothly sailed through the three year turbulence with an average annual return of 17.83%. The market value of Blue Ridge’s public equity portfolio stood at $8.77 billion at the end of the first quarter. The consumer discretionary and healthcare sectors were the most popular ones of the fund manager, who maintains a diversified portfolio across several sectors.

A reader might question our decision to focus on the small-cap category, considering that its mostly the larger counterparts of these companies that head the portfolios of most hedge funds. The reason for our focus is simple. Our research has shown that in the period between 1999 and 2012 the top small-cap picks of hedge funds outperformed the broader market by nearly one percentage point per month, whereas the top overall picks (mostly large-caps) underperformed by seven basis points per month during the same period. Why pay high fees to own a glut of low-performing stocks when you can invest on your own in hedge funds’ best stock picks? Since its launch in August 2012, Insider Monkey’s small-cap strategy has outperformed the S&P 500 every year, returning over 142% since then, nearly 2.5 times greater than the S&P 500′s returns (read the details here).

Blue Ridge acquired some 46,100 shares of Platform Specialty Products Corp (NYSE:PAH) during the first quarter to take its total stake in the company to 11.0 million shares valued at $282.26 million. The holding represented 3.22% of the fund’s portfolio value. So far this year Platform Specialty Products Corp (NYSE:PAH) is up by nearly 20%, while the Russell 2000, the small-cap index has posted comparatively lackluster returns of about 5% in the same period. The $5.33 billion producer of high technology specialty chemical products beat both the top and bottom line estimates in its financial results for the first quarter. Among over 700 funds that we track, renowned activist Bill Ackman‘s Pershing Square is the largest stockholder of Platform Specialty Products Corp (NYSE:PAH),  owning about 42.74 million shares valued at $1.10 billion.

Another strong performer this year among Griffin’s small-cap picks has been MGIC Investment Corp. (NYSE:MTG), as it has returned over 20% year-to-date. Blue Ridge’s stake in the $3.82 billion private mortgage insurer amounts to 14.90 million shares valued at $143.49 million and representing 1.64% of its portfolio value. For the month of May, MGIC Investment Corp. (NYSE:MTG) posted solid operating statistics. New primary insurance written stood at $3.7 billion as compared to $2.8 billion a year ago and the delinquent inventory comprised 68,224 loans at the end of the month, in contrast to 86,415 loans at the end of May of 2014. Lee Ainslie‘s Maverick Capital holds a large stake of 13.56 million shares of MGIC.

Blue Ridge’s stake in PBF Energy Inc (NYSE:PBF) amounts to 3.16 million shares valued at $107.19 million. The fund has held a position in the $2.43 billion energy company since the last quarter of 2013. PBF Energy Inc (NYSE:PBF)’s stock is trading almost sideways on a year-to-date basis. Seth Klarman’s Baupost Group and Robert Joseph Caruso’s Select Equity Group are the largest stockholders of PBF Energy Inc (NYSE:PBF) in our database, with respective holdings of 8.66 million shares valued at $293.85 million and 4.69 million shares valued at $159.25 million.

After boosting its stake in Post Holdings Inc (NYSE:POST) by 29% during the first quarter, Blue Ridge held 2.21 million shares valued at $103.28 million of the consumer packaged goods company. Another strong performer this year, Post Holdings Inc (NYSE:POST)’s stock is up by nearly 11% so far. John Paulson’s Paulson & Co is the largest shareholder of Post Holdings Inc (NYSE:POST) in our database with some 2.58 million shares valued at $120.63 million.

At the end of the first quarter, Blue Ridge held 2.47 million shares of Kate Spade & Co (NYSE:KATE) valued at $82.47 million. The stock of the $3.25 billion designer of accessories and apparel has slumped by over 20% so far this year. The apparel manufacturing industry has generally been facing weakness this year and is down by a little more than 4% so far. The hedge fund interest in Kate Spade & Co (NYSE:KATE) has declined over the first quarter as 29 firms had an aggregate investment of $902.92 million in the company at the end of March compared to 32 funds with $864.06 million invested at the end of the previous quarter. Robert Pohly‘s Samlyn Capital is the largest shareholders of those, holding about 4.53 million shares valued at $151.28 million.

Disclosure: None

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