William Duhamel founded Route One Investment Company along with his partners Jason E. Moment, Ashish H. Pant and Richard H. Voon in 2010 with over $500 million in assets under management (AUM). The fund recently filed its latest 13F with the Securities and Exchange Commission (SEC) for the quarter ending March 31. We started tracking this hedge fund from the last quarter of 2011 when its total public equity portfolio was valued at $431.8 million, which since then has almost doubled to $873 million. Being a value-focused hedge fund, its portfolio is heavily concentrated and is comprised of only ten stocks. Moreover, the fund increased its stake in each of these ten stocks in the first quarter. Over half of the fund’s current public equity portfolio consists of technology and consumer goods stocks. In this article we are going to elaborate in detail on the current top three small-cap picks of Route One Investment Company – Post Holdings Inc (NYSE:POST), Compania Cervecerias Unidas S.A. (ADR)(NYSE:CCU), and Herbalife Ltd. (NYSE: HLF).
But before we proceed to discussing each of these stock, let’s first understand the benefits of tracking hedge funds’ holdings, especially small-cap holdings. Our research has shown that the 15 most popular small-cap stocks held by hedge funds generally outperform the broader markets by a wide margin over a long period of time. In the period between 1999 and 2012, that out-performance was nearly 1 percentage point per month on average, whereas in the same period the top 50 overall holdings of hedge funds (mostly large-cap stocks) underperformed the market by seven basis points per month on average. Moreover in the forward tests from the end of August 2012, Insider Monkey’s small-cap strategy returned 144%, outperforming the S&P 500 ETF (SPY) by 84 percentage points (read the details here).
Route One increased its stake in its top small-cap pick Post Holdings Inc (NYSE: POST) by 3% to 2.42 million shares as of March 31 valued at $113.69 million. However, despite the increase and a strong performance by its shares in the first quarter, the fund’s position in Post Holdings Inc (NYSE: POST) now comprises just 13.02% of its public equity portfolio, down from 17.47%, owing to the fund greatly increasing its stake in many other companies that it holds. After its IPO in January 2012, shares of the consumer packaged goods holding company rose steadily to touch the $60 mark in March 2014, but have fallen significantly since then. Most analysts on the Street who cover the company have an ‘Overweight’ rating on it with an average price target of $60.50. In its latest earnings release, the company declared diluted EPS of $0.45, compared to a diluted EPS loss of $0.67 in the same quarter last year. Among the hedges fund we track, John Paulson’s Paulson & Co is the only one that currently owns more shares of Post Holdings Inc (NYSE: POST) than Route One.
After initiating its stake in Chile-based beverage company Compania Cervecerias Unidas S.A. (ADR) (NYSE:CCU) during the fourth quarter of 2013, Route One has steadily increasing its stake from 120,000 shares initially to 3.87 million shares by March 31, which are currently valued at $80.41 million. While Route One continues to be bullish on the stock, analysts are not as optimistic, with the stock currently maintaining an ‘Underweight’ average recommendation. However, many of the hedge funds with positions in the company among those we track also seem to be bullish on the company, having increased their stakes in the first quarter. Among them are Jean-Marie Eveillard’s First Eagle Investment Management and Chuck Royce’s Royce & Associates.
Although Herbalife Ltd. (NYSE: HLF) is third among the top small-cap picks of Route One, it happens to be the stock in which the fund increased its stake by the greatest amount during the first quarter. Route One now holds 1.77 million shares of the company, a 144% increase, with the stake now valued at $75.80 million. Herbalife Ltd. (NYSE: HLF) has been in the news regularly over the past year due to the crusade against it by activist investor Bill Ackman, which resulted in its stock falling significantly in 2014. Even though the stock has managed to recover 40% this year, it is still well below the $80 highs it enjoyed in the beginning of 2014. However, as long as two of the most legendary investors on the Street, Carl Icahn and George Soros, continue to hold Herbalife Ltd. (NYSE: HLF) in their portfolios, it doesn’t seem like other investors in the stock have as much to fear.