Raptor Capital Management is a hedge fund founded by James Pallotta. As a part of Raptor Group Holdings, this hedge fund specializes in investing in public and private equities across a broad variety of sectors, regions and asset classes. Prior to forming Raptor Group in 2009, James was a partner with Paul Tudor Jones’ Tudor Investment Corporation, where he had responsibility for over $10 billion in long/short equities and pioneered Tudor’s venture capital program and Tudor’s outside managers’ seeding business. Mr. Pallotta’s 14 positions in companies with a market cap of $1 billion or more returned 10.6% in the first quarter.
We’ll get to those picks in a minute, but firstly, why do we monitor the activity of hedge funds so closely? At Insider Monkey we track more than 700 hedge funds, analyze their returns and follow the stocks they invest in. We now know that a smaller investor can benefit more by investing in the best small-cap stock ideas of these funds. We conducted backtests of the equity portfolios of hundreds of hedge funds between 1999 and 2012 and discovered that the 15 most popular small-cap stocks provided returns of nearly one percentage point per month above the S&P 500 Total Return Index (read more about our backtests). Inspired by the results of these backtests, we launched a strategy that is based on imitating the 15 most popular small-cap stock picks of the more than 700 hedge funds from our database. This strategy generated cumulative returns of 137% over the last 2.5 years, beating the S&P 500 ETF (SPY) by 80 percentage points during that time.
The lion’s share of Pallotta’s gains in his 13F portfolio was due to Hospira, Inc. (NYSE:HSP). Shares of the pharmaceutical company surged after Pfizer Inc. (NYSE:PFE) announced in February it would acquire the company for $90 per share. At the beginning of 2015, Pallotta held 159,501 shares of Hospira, Inc. (NYSE:HSP) with a value of $9.8 million, representing 13.35% of his equity portfolio. Hospira, Inc. (NYSE:HSP) shares gained over 40% for the first quarter.
Pallotta’s next top pick was Level 3 Communications, Inc. (NYSE:LVLT), which was the third largest in Raptor’s 13F portfolio. According to the latest filing, the firm held 165,000 shares valued at $8.1 million, accounting for 11% of its 13F portfolio. Investors like Level 3 Communications, Inc. (NYSE:LVLT) partly because of its superior cash flow. In 2014, the company reported almost $400 million in operating cash flow. Further, its recent $5.7 billion acquisition of TW Telecom will further solidify Level 3 Communications, Inc. (NYSE:LVLT)’s position as a premier global communications provider. Other funds invested in the company are Mason Hawkins’ Southeastern Asset Management and Keith Meister’s Corvex Capital. Both funds became holders as a result of the conversion of TW Telecom’s stock.
Raptor’s quarter would have been better had it not been for Pallotta’s position in AOL, Inc. (NYSE:AOL). Raptor held 119,474 shares of AOL, Inc. (NYSE:AOL) at a value of $5.5 million, representing a 7.5% position in its 13F portfolio. Pallotta’s conviction, however, didn’t seem to be very high as he sold off much of the position in the fourth quarter, decreasing it by almost 70% compared to the previous quarter. This was in contrast to other major investors who were adding to their positions, like D E Shaw, which increased its holding by 23%, and Iridian Asset Management run by David Cohen and Harold Levy, which added 14% to its position in AOL, Inc. (NYSE:AOL).
Baidu Inc (ADR) (NASDAQ:BIDU) was another laggard for Raptor. The firm held 25,800 shares of Baidu Inc (ADR) (NASDAQ:BIDU) at a value of $5.8 million. This represented an 8% cut of its 13F portfolio. Among the funds we track, Stephen Mandel’s Lone Pine Capital is the largest holder with 7.0 million shares valued at $1.6 billion,followed by Philippe Laffont’s Coatue Management with 2.9 million shares valued at $672 million according to their latest filings. Investors remain bullish on Baidu because of its exposure to the Chinese search market, where Google Inc (NASDAQ:GOOG) is blocked, which allows the company to take advantage of $15 billion that will be spent on search advertising in 2015 alone. Shares of Baidu Inc (ADR) (NASDAQ:BIDU) fell 8.5% for the first quarter.
Pallotta had another solid pick in Alere Inc (NYSE:ALR). At the beginning of the year, Raptor held 89,300 shares with a value of $3.4 million, representing a 4.6% position in its 13F portfolio. Pallotta did start to cut Raptor’s holding in Alere Inc (NYSE:ALR) in the fourth quarter, by 26%. Alere Inc (NYSE:ALR), a provider of point-of-care diagnostics and services gained 28% in the first quarter of 2015. Last month Goldman Sachs upgraded Alere due in part to a positive fourth quarter and its plan to focus on toxicology and point-of-care diagnostic products, which could produce wider margins. Scopia Capital run by Matt Sirovich and Jeremy Mindich holds 5.4 million shares at a value of $205 million. This is followed by William Gray’s Orbis Investment Management which has 2.9 million shares at a value of $110 million.