Herbalife Ltd. (HLF) & Other Top Picks of Route One Investment Company

At Insider Monkey we analyze equity portfolios of over 700 hedge funds in order to identify best performing stocks in which hedge funds invest their money. Through years of research we discovered that following the most popular stocks among hedge funds is not the best strategy to beat the market, because hedge funds usually invest in large-cap stocks which are more efficiently priced. However, this doesn’t mean that a smaller investor can’t get an edge in beating the market by investing in the same stocks as hedge funds do. The key is to follow hedge funds’ small-cap picks. With this in mind we developed a strategy that is based on forming a portfolio consisting of 15 most popular small-cap picks among hedge funds. Our strategy provided a cumulative return of 132% in the last 2.5 years and beat the market by 79 percentage points.

Nevertheless, large-cap stocks in which hedge funds invest can also provide some interesting points, especially when a company is targeted by an activist investor, which usually sense the stock higher. Moreover, the stock of a company can go up when an activist that is short loses a fight. This is the case of Herbalife Ltd. (NYSE:HLF), which in Wednesday intraday trading was shaping up as one of the top gainers, and closed 13% in green. The jump came after a court dismissed a lawsuit against Herbalife that alleged the maker of nutritional products portrayed itself as a legitimate company, while in fact it was an illegal pyramid scheme. The rulling represents a lost battle by notorious activist Bill Ackman of Pershing Square, who has been campaigning against the company and claiming that it had fraudulently inflated its stock price, as well as other short-sellers. However, many other investors have benefited from the Herbalife Ltd. (NYSE:HLF)’s win, although the stock still trades significantly below its 52-week high and is down by 28% over the last year. Among the funds that we track, investors with long positions in Herbalife include Carl Icahn and George Soros, who own 17.0 million shares and 3.45 million shares respectively; Soros upped his stake in the company by 83% during the fourth quarter of 2014.

Herbalife Ltd. (NYSE:HLF)

While the story with Herbalife Ltd. (NYSE:HLF) is far from being over, some investors bet on a positive outcome and that Herbalife’s stock will rebound. The last round of 13F filings showed that seven hedge funds among those that we track initiated long positions in the company, the largest stake of them being held by William Duhamel‘s Route One Investment Company. Route One is a relatively small hedge fund, which holds a diversified equity portfolio valued at around $567.55 million. However, even though the fund’s equity portfolio is small, it invests primarily in large-cap stocks, his top three holdings being represented by Twenty-First Century Fox Inc (NASDAQ:FOX)Post Holdings Inc (NYSE:POST), and Microsoft Corporation (NASDAQ:MSFT).

In Twenty-First Century Fox Inc (NASDAQ:FOX), Route One initiated a stake during the third quarter of 2013, and since then the position was slightly raised to 3.01 million shares held at the end of 2014, from 2.81 million shares held initially. The stock remained almost flat since then. Meanwhile, last year, the media and entertainment company run by Rupert Murdoch made a bid to buy Time Warner Inc (NYSE:TWX). The combination of both companies could create one of the largest media conglomerates in the world, but in August Fox retracted its offer. Nevertheless, since Twenty-First Century Fox Inc (NASDAQ:FOX) is one of the largest media companies by market capitalization, investors are still bullish as the data from the last round of 13F filings showed. A total of 90 funds among those that we track disclosed long positions in Twenty-First Century Fox Inc (NASDAQ:FOX), including 11 funds led by billionaires, among whom is Jeffrey Ubben’s ValueAct Capital, which raised its stake by 21% during the fourth quarter to 30.30 million shares.

In Post Holdings Inc (NYSE:POST), Route One reported an $99.16 million stake that contains 2.37 million shares. The fund has raised its stake in the company throughout the whole last year raising it from 255,500 shares reported initially as of the end of 2013. Meanwhile, the stock of the producer of packaged foods lost 15% during 2014, significantly underperforming the industry, which appreciated by around 20%. Recently Post Holdings Inc (NYSE:POST) announced that it plans to close its PowerBar manufacturing facility in Idaho by July, which will result in laying off 165 employees and in costs savings of around $4.0 million. The move comes in line with other food producers, such as General Mills, Inc. (NYSE:GIS), which announced in January its plans to close two dough factories in Pitsburgh and Kellogg Company (NYSE:K), which earlier this year shut down its plant in Ontario. Route One is the largest shareholder of Post Holdings Inc (NYSE:POST) among the funds that we track, followed by John Paulson’s Paulson & Co, which owns 1.93 million shares as of the end of 2014.

Mr. Duhamel is also bullish on Microsoft Corporation (NASDAQ:MSFT), in which Route One holds a $91.22 million stake that contains 1.96 million shares. The tech giant has recently made some exciting announcement such as plans to release its new operating system, Windows 10 this summer, sooner than expected. Moreover, Ford Motor Company (NYSE:F) has chosen Microsoft to develop connected car services systems, Sync 3 in Ford’s fleet. Among investors Microsoft Corporation (NASDAQ:MSFT) also enjoys a significant level of popularity as it is one of the most favored tech stocks among the hedge funds that we track, with a total of 114 investors holding $17.87 billion worth of stock as of the end of 2014. Jeffrey Ubben’s ValueAct Capital is the largest shareholder of Microsoft Corporation (NASDAQ:MSFT) among the funds that we track, holding 74.24 million shares, according to its latest 13F filing.

Disclosure: none