Eclectic Mix of Stocks Added to WCG Management’s Portfolio

Quarterly 13F filings are required to be submitted with the U.S. Securities and Exchange Commission within 45 days following the end of each fiscal quarter, so retail investors will have access to all 13Fs for the first quarter of 2016 on May 16. While most top-tier hedge fund vehicles usually file their 13Fs only a few days before the deadline, there are some funds that have already submitted their quarterly filings. WCG Management L.P., founded by Barry Wittlin in 2007, is among the hedge fund vehicles tracked by Insider Monkey that recently submitted its 13F for the first quarter of this year, which enables us to identify major moves implemented during the quarter. WCG Management is New York-based investment management firm that specializes in discretionary, Global Macro investing. Although the investment firm oversees a rather small-sized equity portfolio, which is worth only $82.83 million as of the end of March, it would be particularly interesting to find out where certain small players within the hedge fund industry see opportunities. For that reason, this article will discuss five new additions to WCG Management’s portfolio during the first quarter of 2016.

At Insider Monkey, we track around 730 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

VOLVO AB (OTCMKTS:VOLVF)

– Number of shares held by WCG Management as of March 31: 370,000 Class B Shares

– Value of WCG’s holding as of March 31: $4.07 Million

WCG Management L.P. acquired a new stake of 370,000 Class B shares of VOLVO AB (OTCMKTS:VOLVF), which were valued at $4.07 million on March 31. In the first quarter of 2016, net sales of the Swedish truckmaker decreased 4% year-on-year due to a slowdown in the North American truck market, as well as sustained challenges in Brazil. The Gothenburg-based auto manufacturer recently has said that the North American retail market for heavy-duty trucks slumped by 7% year-on-year in the first quarter of 2016. The so-called correction in the North American market was mainly driven by sluggish freight volumes, increased availability of competitively-priced used trucks and lower rates of fleet renewal, partially offset by a strengthening construction industry, depressed fuel prices and low interest rates. The number of Volvo’s registrations in Brazil declined 27% year-on-year in the first quarter due to the continued contraction of the economy and low business confidence. However, the European market is showing positive growth, as freight activity remained at high levels during the quarter. Despite lower first-quarter revenues, Volvo AB’s management managed to maintain profitability due to a lower cost base and increased focus on adjusting production to changes in demand.

CalAtlantic Group Inc. (NYSE:CAA)

– Number of shares held by WCG Management as of March 31: 138,000

– Value of WCG’s holding as of March 31: $4.62 Million

The New York-based investment management firm added a 138,000-share position in CalAtlantic Group Inc. (NYSE:CAA) to its portfolio during the March quarter, which was worth $4.62 million at the end of March. CalAtlantic Group, which was created through the merger of homebuilders Standard Pacific Corp. and The Ryland Group in October 2015, constructs well-crafted homes in more than 40 metropolitan statistical areas. The diversified builder of single-family attached and detached homes had a significant amount of debt at the end of 2015, with the principal amount of its homebuilding senior notes outstanding reaching $3.38 billion. $280.0 million of this principal amount matures in 2016, while $1.03 billion of that amount matures between 2017 and 2018. Meanwhile, CalAtlantic Group had cash and cash equivalents of $363.29 million at the end of December. Shares of CalAtlantic are down by 10% since the beginning of 2016 and currently trade at a forward P/E multiple of 8.7, which is below the ratio of 12.0 for the Homebuilding industry. Ken Griffin’s Citadel Advisors had 4.19 million shares of CalAtlantic Group Inc. (NYSE:CAA) in its equity portfolio at the end of December.

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Red Hat Inc. (NYSE:RHT)

– Number of shares held by WCG Management as of March 31: 69,000

– Value of WCG’s holding as of March 31: $5.13 Million

Barry Wittlin and his team found Red Hat Inc. (NYSE:RHT) to be an attractive investment opportunity in the first quarter of 2016, during which WCG Management purchased a new stake of 69,000 shares. The $5.13 million-position accounted for 6.20% of the fund’s equity portfolio at the end of March. The provider of open source software solutions has seen its market value decline by 10% year-to-date. Open source software, whose code is available for modification, represents an alternative to proprietary software, with Red Hat becoming a role model in this space. In mid-April, analysts at Pacific Crest upgraded Red Hat to ‘Overweight’ from ‘Sector Weight’, citing sales diversification with newer products such as OpenShift. Pacific Crest, which has a price target of $88 on the stock, said “Red Hat is increasingly winning large deals due to the strategic nature of its stack”. The company’s management recently stated a revenue target of $5 billion in the next five years, which implies a compound annual growth rate of 16%. The stock is priced at a hefty forward P/E ratio of 28.5, but the CAGR rate of 16% seems to justify this valuation. D.E. Shaw & Co., founded by David E. Shaw, owned 1.05 million shares of Red Hat Inc. (NYSE:RHT) on December 31.

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Canadian Pacific Railway Limited (USA) (NYSE:CP)

– Number of shares held by WCG Management as of March 31: 48,439

– Value of WCG’s holding as of March 31: $6.45 Million

WCG Management also purchased a new stake in Canadian Pacific Railway Limited (USA) (NYSE:CP), comprised of 48,439 shares valued at $6.45 million at the end of March. The Canada’s second-largest railway operator was the third-largest equity holding in WCG’s equity portfolio at the end of the first quarter, accounting for 7.78% of the fund’s portfolio. Canadian Pacific Railway recently revealed plans to drop its merger efforts with regard to Norfolk Southern Corp. (NYSE:NSC), citing fierce opposition from rival railroad operators, shippers and the U.S. Justice Department. Instead, the company’s Board authorized a buyback program of up to 6.91 million shares, which represents roughly 5% of the company’s outstanding common stock. Moreover, the Board also authorized an increase in the company’s quarterly dividend to $0.50 per share from a significantly lower dividend of $0.35 per share. Canadian Pacific also reputed plans to engage in mergers and acquisitions activities, saying that M&A activity is “dead” for now. The Canadian railway operator has seen its shares gain 13% year-to-date. According to a fresh 13D filing, Bill Ackman’s Pershing Square owns 9.84 million shares of Canadian Pacific Railway Limited (USA) (NYSE:CP), which account for 6.40% of the company’s shares.

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ConocoPhillips (NYSE:COP)

– Number of shares held by WCG Management as of March 31: 190,000

– Value of WCG’s holding as of March 31: $7.64 Million

WCG Management also turned bullish on ConocoPhillips (NYSE:COP) in the first quarter of 2016, as the fund acquired a new stake of 190,000 shares of the company. The 190,000-share position was valued at $7.64 million on March 31 and accounted for 9.23% of the fund’s equity portfolio. The world’s largest independent exploration and production (E&P) company was recently downgraded to ‘Underperform’ from ‘Hold’ at Jefferies, which said the stock “is now trading 27% above our target price of $37”. Moreover, analysts at Jefferies asserted that ConocoPhillips has a three-turn premium to the sector’s average P/E by 2018, which simply implies that the company’s stock is three times more expensive than the shares of other peers that will be generating similar bottom-line figures in 2018. Shares of ConocoPhillips are up 30% in the past three months, but are still down nearly 1% year-to-date. In February, the company announced a reduction of its quarterly dividend payment to $0.25 per share from $0.74 per share, in an attempt to preserve balance sheet strength. Russell Lucas’ Lucas Capital Management owns 38,736 shares of ConocoPhillips (NYSE:COP) as of March 31.

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