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John Shapiro’s Value Investing Picks Pay Off Big Time In First Quarter

John Shapiro‘s equity holdings for his fund Chieftain Capital delivered an outstanding 10% weighted average return for the first quarter of 2015. Although the above metric takes into account all the 10 equity holdings of Chieftain, according to the latest 13F filing, it doesn’t include other financial instruments that the hedge fund is not required to publicly disclose. This could in effect significantly change Chieftain’s actual returns from our estimates.

Express Scripts Holding Company

Shapiro founded Chieftain Capital in 2010 after the original firm, Chieftain Capital, had to be dismantled owing to differences with its co-founder, Glenn Greenberg. What remains more or less the same are the pillars of the firm’s investment philosophy. Some of these are as follows: no holding should represent less than 5% of the portfolio value, new companies are usually avoided even though they might offer considerable growth prospects, since the chance of them disappearing altogether is very real, and businesses with a low market valuation are sought, so in future they have a greater chance to outgrow the market. Key performers of Chieftain’s portfolio for the first quarter were: Express Scripts Holding Company (NASDAQ:ESRX), Hanesbrands Inc. (NYSE:HBI), Sensata Technologies Holding N.V. (NYSE:ST), UnitedHealth Group Inc. (NYSE:UNH), and American International Group Inc (NYSE:AIG).

Most investors don’t have enough time to do in-depth analysis on each stock that they want to include in their portfolios. Professional investors, like John Shapiro, spend weeks conducting due diligence on each company and spend a lot of money on obtaining information and paying the salaries of Ivy League-educated analysts. That’s why we have always believed that imitating the stock picks of hedge funds and billionaire investors is an excellent shortcut we can take. It doesn’t cost an arm and a leg either. We analyzed the historical stock picks of these investors and our research revealed that the small cap picks of hedge funds performed better than the market and their large-cap picks. A portfolio of 15 most popular small caps among several hedge funds outperformed the S&P 500 Total Return Index by 95 basis points per month between 1999 and 2012. The exceptional results of this strategy got even better in the forward tests we have been conducting since the end of August 2012. The most popular small-cap stocks among hedge funds beat the market by more than 79 percentage points since then, returning more than 132% (see the details here).

Shapiro added Express Scripts Holding Company (NASDAQ:ESRX) to Chieftain’s equity portfolio during the second quarter of 2013 by acquiring about 3.55 million shares. The holding  was increased over the following year, but was slashed by 35% in the fourth quarter of 2014 to 3.50 million shares valued at $296.28 million. The stock posted a 2.48% return in the first quarter of the current year. Express Scripts Holding Company (NASDAQ:ESRX) is focused on reducing the prescription related waste arising from factors such as costly drugs. According to the pharmacy benefit management, this waste in resources amounts to hundreds of billions of dollars every year. In this regard the company has been trying to break the hold of Gilead Sciences, Inc. (NASDAQ:GILD)’s expensive treatment for hepatitis C with AbbVie Inc (NYSE:ABBV)’s cheaper one. Among the funds that we track, Robert Rodriguez and Steven Romick’s First Pacific Advisors LLC held the largest stake in Express Scripts Holding Company (NASDAQ:ESRX) with 4.50 million shares valued at $380.62 million.

The star performer in Chieftain’s portfolio was its second largest holding, Hanesbrands Inc. (NYSE:HBI), which rose by 20.5% over the first quarter. The fund held 2.27 million shares valued at $253.82 million in the $13.48 billion company, which has apparel brands like Maidenform, Just My Size, Wonderbra and Gear for Sports in its portfolio. Hanesbrands Inc. (NYSE:HBI)’s latest acquisition of Knight Capital will expand its portfolio of licensed college apparel. Its “Gear for Sports” brand is already a leader in the sale of such apparel in university bookstores. Two other funds with prominent stakes in Hanesbrands Inc. (NYSE:HBI) are Alexander Mitchell‘s Scopus Asset Management and Robert Bishop’s Impala Asset Management.

Sensata Technologies Holding N.V. (NYSE:ST)‘s 9.62% first quarter return also helped to tick Chieftain’s returns in the right direction. The fund held some 4.48 million shares valued at $235 million of the technology company, according to the investor’s latest 13F filing. The manufacturer of sensors and controls has also earned the confidence of John Griffin as he holds some 6.59 million shares of Sensata Technologies Holding N.V. (NYSE:ST) in his fund, Blue Ridge Capital’s portfolio. The company expanded its tire pressure monitoring sensors division last year by acquiring the Schrader group of companies, which is headquartered in Denver, Colorado.

UnitedHealth Group Inc. (NYSE:UNH) was another strong performer during the quarter as it appreciated by 17.41%. Chieftain’s stake in the company amounted to 1.66 million shares valued at $167.92 million. The healthcare company was recently upgraded to a buy rating by Jeffries and its price target was raised to $141. Another prominent stockholder of UnitedHealth Group Inc. (NYSE:UNH) is Boykin Curry’s Eagle Capital Management.

American International Group Inc (NYSE:AIG) slightly weighed down Chieftain’s gains for the first quarter as the stock fell by about 1.97% during the period. The fund initiated a position in the insurance provider during the second quarter of 2014, which was raised by 28% and 5% in the next subsequent quarters to 3.84 million shares valued at $214.85 million. American International Group Inc (NYSE:AIG) has recently been granted FAA’s permission to use drones instead of insurance inspectors in risky disaster struck areas in order to assess the damage and process insurance claims. Richard Perry’s Perry Capital held 10.33 million shares valued at $578.3 million at the end of 2014.

Disclosure: None

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