Locust Wood Capital’s Top Stock Picks For Q4

Locust Wood Capital Advisers is a New York-based long/short equity hedge fund founded by Stephen J. Errico in 2002. Prior to founding the firm, Mr. Errico worked for 20 years at several reputed Wall Street firms including Lehman Brothers, Inc., Paine Webber Inc., and Morgan Stanley Inc. Having started its journey with $29 million in assets under management (AUM), the fund has now grown to $940 million in AUM as of September, 2015. Locust Wood recently submitted its 13F with the SEC for the reporting period of September 30. The filing revealed that at the end of September Locust Wood’s U.S equity portfolio was worth $740.22 million and consisted of positions in 36 companies. In this article we are going to take a closer look at the fund’s top five stock picks going into the fourth quarter.

But before we proceed to that let’s first explain why we track hedge fund activity. From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 37 month period beginning from September 2012, returning 102% (read the details here).

#5 DaVita HealthCare Partners Inc (NYSE:DVA)

Shares Owned by Locust Wood Capital Advisers (as of September 30): 461,031 shares

Value of Holding (as of September 30): $33.35 Million

Let’s start with DaVita HealthCare Partners Inc (NYSE:DVA), in which Locust Wood increased its stake by 87% or 215,532 shares during the third quarter. Although shares of the company lost almost 9% during the quarter, they made a recovery during October and currently trade up by 2.02% year-to-date. The company reported its third quarter results on November 3, declaring EPS of $1.00 on revenue of $3.53 billion versus analysts’ expectations of EPS of $0.97 on revenue of $3.46 billion. Following the earnings announcement, analysts at Piper Jaffray reiterated their ‘Buy’ rating on the stock on November 4, but reduced their price target on it to $90 from $92. Legendary investor Warren Buffett of Berkshire Hathaway was the largest shareholder of the company at the end of June among the firms tracked by us; it held over 38.5 million shares of DaVita HealthCare Partners Inc (NYSE:DVA).

#4 Liberty Broadband Corp (NASDAQ:LBRDK)

Shares Owned by Locust Wood Capital Advisers (as of September 30): 698,243 shares

Value of Holding (as of September 30): $35.73 Million

Liberty Broadband Corp (NASDAQ:LBRDK) is the only stock among Locust Wood’s top five stock picks in which the fund reduced its stake, by 7% or 60,230 shares. After spiking during the first quarter of the year, shares of Liberty Broadband Corp (NASDAQ:LBRDK) have more or less held on to those gains throughout the next two quarters and currently trade up by 8.41% for the year. On November 2, John C. Malone, Chairman of the Board of Liberty Broadband, sold 26,000 shares of the company at an average price of $54.38. Following this transaction Mr. Malone owns over 4.33 million shares of the company. David Gallo‘s Valinor Management LLC more than doubled its stake in the company during the second quarter to nearly 2.6 million shares.

The second page has Locust Wood’s top three picks, be sure to check them out.

#3 Allergan PLC (NYSE:AGN)

Shares Owned by Locust Wood Capital Advisers (as of September 30): 144,580 shares

Value of Holding (as of September 30): $39.30 Million

Locust Wood initiated a substantial stake in Allergan PLC (NYSE:AGN) [formerly Actavis PLC] during the July-September period, making the company its third-largest equity holding in the process. After rising gradually throughout the first seven months of the year, the stock of Allergan PLC (NYSE:AGN) has been crushed since the start of August. However, it has recovered significantly since the news broke last month that the company is in early talks with pharmaceutical behemoth Pfizer Inc. (NYSE:PFE) concerning a possible merger. On November 4, Allergan PLC declared its third quarter earnings, reporting EPS of $3.48 on revenue of $4.10 billion. The Street was expecting the company to report EPS of $3.18 on revenue of $5.71 billion. Clifford Fox’s Columbus Circle Investors reduced its stake in the company by 89,319 shares to 836,352 shares during the third quarter.

#2 McDonald’s Corporation(NYSE:MCD)

Shares Owned by Locust Wood Capital Advisers (as of September 30): 464,587 shares

Value of Holding (as of September 30): $45.78 Million

The big bet that Locust Wood made on McDonald’s Corporation (NYSE:MCD) by adding an additional 48% or 151,477 shares of the company to its holding during the third quarter seems to be working out nicely, with the stock of the company registering gains of more than 14% during October and continuing to hold on to those gains in November. A large part of these gains came after the company announced better-than-expected numbers for its third quarter on October 22, after many disappointing quarters. While analysts had expected the company to report EPS of $1.28 on revenue of $6.41 billion, it reported EPS of $1.40 on revenue of $6.62 billion. Analysts at Cowen and Company increased their price target on the stock of McDonald’s Corporation (NYSE:MCD) to $112 from $103, on November 6. Zach Schreiber‘s Point State Capital also initiated a stake in the company during the second quarter by purchasing over 4.55 million shares.

#1 Liberty Ventures (NASDAQ:LVNTA)

Shares Owned by Locust Wood Capital Advisers (as of September 30): 2.07 million shares

Value of Holding (as of September 30): $83.69 Million

Finally, Locust Wood Capital Advisers purchased an additional 824,758 shares of Liberty Ventures (NASDAQ:LVNTA) during the third quarter, making the company its top holding for that period. Liberty Ventures consists of several subsidiaries of Liberty Interactive Group (NASDAQ:QVCA) and the minority stake that Liberty Interactive Group (NASDAQ:QVCA) holds in a large number of companies. Owing to the rally Liberty Ventures (NASDAQ:LVNTA)’s stock had during the first five months of the year, it is still trading up by 11.74% year-to-date despite some volatility in recent months. On October 1, Liberty Interactive completed its acquisition of zulily, acquiring all of the remaining shares of the company. Barry Rosenstein’s JANA Partners was one of the largest shareholders of Liberty Interactive Group(NASDAQ:QVCA) at the end of second quarter, owning over 8.0 million shares.

Disclosures: None