Oil Makes An Impressive Debut In WCG Management’s Top Q4 Stock Picks

Barry Wittlin‘s WCG Management is a force to reckon with in the world of bond and currency investing. Wittlin started the New York-based, macro-focused fund in 2007 following his stint at Morgan Stanley as a Senior Vice President and Head of Strategic Risk Trading for Global Markets & Investment. The fund recently submitted its 13F filing with the Securities and Exchange Commission (SEC) for the reporting period of September 30. According to the filing, the US equity portfolio of WCG Management at the end of September was worth slightly above $222 million. Since WCG Management invests most of its assets under management, which stands at over $4.3 billion (as of April, 2014), in bonds and currencies, the small investments it makes in the equity markets are more noteworthy. Unlike most other hedge funds which deal primarily in equities, it is under no compulsion to invest in the equity markets. Therefore, one can conclude that WCG invests in stocks only when it has high conviction that those particular stocks will generate superior returns. Taking this reasoning into consideration, we at Insider Monkey decided to analyze WCG Management’s top five stock picks at the end of the third quarter. Read further to know which stocks WCG Management is betting on.

We track hedge funds and prominent investors 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 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated ten percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks have beaten the market by 53 percentage points (102% return vs. the S&P 500’s 49% gain) over the last 37 months (see the details here).

#5 Stanley Black & Decker, Inc. (NYSE:SWK)

Shares Owned by WCG Management (as of September 30): 182,263 shares

Value of Holding (as of September 30): $17.54 million

Though WCG Management added 1,000 shares of Stanley Black & Decker, Inc. (NYSE:SWK) to its portfolio during the third quarter, the 7.33% decline that the company’s shares suffered during the quarter relegated it to the fifth spot in WCG Management’s portfolio, down from the fourth spot that it commanded at the end of June. On a year-to-date basis, shares of the company are trading up by 12.5% , but with a forward price-to-earnings multiple of 16.43, it can be said that the stock is still trading at a reasonable valuation. On October 22, the company came out with mixed third quarter results. While analysts had expected it to report EPS of $1.52 on revenue of $2.82 billion, it reported EPS of $1.55 on revenue of $2.80 billion. Following the earnings release, on October 23, analysts at Barclays reiterated their ‘Equal Weight’ rating on the stock, while upping their price target on it to $124 from $121. Maverick trader Steve Cohen‘s Point72 Asset Management initiated a stake in the company during the second quarter by purchasing 344,300 shares.

#4 McDonald’s Corporation (NYSE:MCD)

Shares Owned by WCG Management (as of September 30): 181,835 shares

Value of Holding (as of September 30): $17.88 million

WCG Management disposed of 27% or 69,000 shares of its former second-largest holding, McDonald’s Corporation (NYSE:MCD), during the July-September period. After remaining sideways for the first nine months of the year, shares of the fast food behemoth experienced a 15% surge in October and are currently trading up by nearly 20% year-to-date. Most of those gains in October came after the company declared its third quarter earnings on October 22. It reported EPS of $1.40 on revenue of $6.62 billion for the quarter, compared to EPS of $1.28 on revenue of $6.41 billion that the analysts were expecting. The major highlight of the quarter was that after two years of decline, U.S sales for the company rose by 0.9% during the period. Activist shareholder Larry Robbins, who earlier this year argued that if the company spins off its real estate assets into an REIT, it will unlock $20 billion in shareholder value, held slightly over 2.9 million shares of McDonald’s Corporation (NYSE:MCD) at the end of June through his hedge fund Glenview Capital.

WCG Management’s top three picks are scrutinized on the forthcoming page.

#3 Visa Inc (NYSE:V)

Shares Owned by WCG Management (as of September 30): 320,495 shares

Value of Holding (as of September 30): $22.18 million

After increasing its stake by 946% during the second quarter, WCG Management again increased its stake in Visa Inc (NYSE:V), by 16% or 46,000 shares during the third quarter. Although shares of the payments technology company remained nearly flat during the third quarter, they are trading up by 19.1% year-to-date thanks mostly to the significant move upwards that they enjoyed during October. On October 2, the same day that it reported its third quarter results, the company also announced that it has agreed to acquire Visa Europe in a $23.4 billion deal. The two entities had parted ways in 2007 after Visa Inc (NYSE:V) announced its plan to go public. For the third quarter, Visa reported EPS of $0.62 on revenue of $3.60 billion versus analysts’ expectations of EPS of $0.63 on revenue of $3.56 billion. On November 3, analysts at Susquehanna reiterated their ‘Positive’ rating on the stock and also increased their price target on it to $87 from $85. Ken Fisher‘s Fisher Asset Management was the largest shareholder of the company at the end of June among the funds tracked by Insider Monkey, owning nearly 14.55 million shares.

#2 Canadian Pacific Railway Limited (USA)(NYSE:CP)

Shares Owned by WCG Management (as of September 30): 152,751 shares

Value of Holding (as of September 30): $22.45 million

Canadian Pacific Railway Limited (USA)(NYSE:CP) was the stock in which WCG Management increased its stake the most significantly during the third quarter, by 531% or 128,572 shares. After remaining range-bound for the first four months of the year, shares of the transcontinental railway operator have had a gradual decline since then and currently trade down by 28% year-to-date. On October 21 the company came out with better-than-expected third quarter earnings, reporting EPS of $2.69 on revenue of $1.71 billion. Analysts had expected the company to report EPS of $2.67 on revenue of $1.69 billion. Following the earnings release, several analyst and brokerages increased their rating or price target on the stock. Among them were analysts at RBC Capital who reiterated their ‘Sector Perform’ rating on the stock, while upping their price target on it to $213 from $202. Renowned activist investor Bill Ackman‘s Pershing Square was the largest shareholder of the company at the end of June among the hedge funds we cover; it held slightly above 13.94 million shares as of June 30.

#1 Noble Energy, Inc. (NYSE:NBL)

Shares Owned by WCG Management (as of September 30): 780,000 shares

Value of Holding (as of September 30): $23.61 million

Finally, it seems the 28.93% drop that the shares of Noble Energy, Inc. (NYSE:NBL) suffered during the third quarter made it too lucrative for WCG Management to resist, as the independent energy company ended up making its debut in the fund’s portfolio right at the very top. On October 29, it was reported that the company is planning to cut more jobs to deal with the decline in crude oil prices.  Yesterday Noble Energy, Inc. (NYSE:NBL) announced that it expects gas to flow from one or both of its discoveries in the Tamar and Leviathan fields in Israel after the company’s Board makes final investment decisions (FIDs). Although the company disappointed in both earnings and revenue when it reported its third quarter results recently, shares of the company still saw an uptick after the earnings release. Noble Energy reported a per share loss of $0.21 on revenue of $801 million, versus analysts’ consensus estimate of a per share loss of $0.15 on revenue of $962.20 million. Following the results, analysts at Macquarie reiterated their ‘Neutral’ rating on the stock, but upped their price target on it to $38 from $36. Doug Gordon, Jon Hilsabeck and Don Jabro‘s Shellback Capital was one of the hedge funds that initiated a stake in the company during the second quarter; as of June 30, it held 600,000 shares.

Disclosure: None