Locust Wood Capital Management’s Top Stock Picks for 2016

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Stephen J. Errico founded New York-based long/short equity hedge fund Locust Wood Capital Advisers in 2002, after spending 20 years working at several prominent financial firms including Lehman Brothers, Inc., Paine Webber Inc. and Morgan Stanley Inc. Since its inception the fund has grown from $29 million in assets under management (AUM) to $940 million in AUM, as of September 30, 2015. For its investments, the firm primarily looks for companies that are undergoing significant corporate transformations and then analyzes whether those transformations are being properly priced by the market. Within investing circles, Locust Wood Capital Advisers is known for exhibiting high quarterly turnover. However, a look at the fund’s latest 13F filing submitted with the Securities and Exchange Commission (SEC) for the reporting period ending December 31 demonstrates that the fund bucked that trend in the fourth quarter. According to the filing, the fund’s portfolio had a relatively low turnover of 21.05% during the October-to-December period. That low turnover was achieved in part by initiating a stake in only five companies while selling off its  stake in only three companies. In this article, we are going to take a closer look at the fund’s top five equity holdings going into 2016.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas (see the details here).

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#5 JPMorgan Chase & Co. (NYSE:JPM)

Shares Owned by Locust Wood Capital Advisers (as of December 31): 539,236

Value of Holding (as of December 31): $35.6 Million

Let’s start with JPMorgan Chase & Co. (NYSE:JPM), of which Locust Wood sold 2,896 shares during the fourth quarter. Nonetheless, JPMorgan Chase & Co. (NYSE:JPM) climbed a spot to become the fund’s fifth-largest holding at the end of 2015. Shares of the banking giant have lost over 14% year-to-date despite the better-than-expected numbers it reported for the fourth quarter on January 14. While analysts were expecting the bank to report EPS of $1.25 on revenue of $22.89 billion, it reported EPS of $1.32 on revenue of $23.70 billion. On February 8, analysts at Deutsche Bank reiterated their ‘Buy’ rating and $70 price target on the stock. Billionaire Ken Fisher‘s Fisher Asset Management increased its stake in JPMorgan Chase & Co. by 1% to nearly 14 million shares during the fourth quarter.

#4 Liberty Interactive Group (NASDAQ:QVCA)

Shares Owned by Locust Wood Capital Advisers (as of December 31): 1.4 million

Value of Holding (as of December 31): $38.31 Million

Though shares of Liberty Interactive Group (NASDAQ:QVCA) remained nearly flat during the fourth quarter, the 195,157 shares of the company that Locust Wood Capital Advisers acquired during the fourth quarter pushed the position up three spots quarter-over-quarter to become the fourth-largest holding of the firm at the end of December. After making their lifetime high of $31.62 in August of last year, shares of Liberty Interactive Group (NASDAQ:QVCA) have steadily drifted lower and currently trade down by over 15% this year alone. The company is expected to report its fourth quarter numbers on February 26 and analysts project it to report EPS of $0.48 on revenue of $3.25 billion. For the same quarter of 2014 the company reported EPS of $0.57 on revenue of $3.25 billion. On December 8, analysts at Pacific Crest initiated coverage on the stock with an ‘Overweight’ rating and $31 price target, which suggests upside potential of about 20%. Billionaire Mario Gabelli‘s GAMCO Investors reduced its stake in Liberty Interactive Group by 7,724 shares during the October-to-December period, to 1.94 million shares.

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