Salesforce, EA, Red Hat: Rail-Splitter Likes These 5 Tech Stocks for Q3

Illinois-based long/short equity hedge fund Rail-Splitter Capital Management recently disclosed its U.S. equity portfolio as of the end of June via a 13F filing submitted with the SEC. The fund was started by John Croghan and Richard Fradin in 2002 as Splitter Capital Management and has grown to hold $585.26 million in regulatory assets under management (AUM) as of February 26, 2016. According to Rail-Splitter Capital Management’s latest 13F filing, its U.S. equity portfolio was worth $416.63 million at the end of the second quarter and was comprised of long positions in 42 stocks. The fund’s exposure is highest to the information technology sector, stocks from which amassed over one-third of the value of its equity portfolio. Considering the fund’s high exposure to the tech sector, we’ll take a look at five of its prominent holdings from that space in this article and analyze their performance so far in 2016.

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#5. J2 Global Inc (NASDAQ:JCOM)

 – Shares Owned by Rail-Splitter Capital Management (as of June 30): 183,564

 – Value of Holding (as of June 30): $11.6 Million

Let’s begin with J2 Global Inc (NASDAQ:JCOM), in which Rail-Splitter Capital Management increased its stake by 7% during the second quarter. Shares of the internet service provider suffered a big drop in March after Citron Research published a bearish report on it, which mentioned that the company is “spending a billion on a roll-up strategy with negative organic growth. J2 has been buying money-losing commoditized cloud computing companies, combining them with a non-performing digital media strategy to inflate its top line, as EBIDTA runs in place.” Though the stock has recovered from that drop over the last few months, it is still trading down by 17% year-to-date. On August 3, the company hiked its quarterly dividend payment by 3% to $0.345 per share, which currently translates into an annual dividend yield of 1.94%. Billionaire Ken Fisher‘s Fisher Asset Management also upped its stake in J2 Global Inc (NASDAQ:JCOM) during the second quarter, by 3% to 140,924 shares.

#4. salesforce.com, inc. (NYSE:CRM)

 – Shares Owned by Rail-Splitter Capital Management (as of June 30): 165,158

 – Value of Holding (as of June 30): $13.12 Million

salesforce.com, inc. (NYSE:CRM) was another tech stock in which Rail-Splitter Capital Management made a small increase to the size of its position during the second quarter, upping it by 4%. salesforce.com, inc. (NYSE:CRM)’s stock took a big hit during the meltdown in the equity markets at the beginning of 2016. However, it bounced back fairly quickly and currently trades with year-to-date gains of 2.15%. In a regulatory filing submitted on August 1, the company revealed that it has acquired cloud word-processing and document-editing service, Quip, for $528 million in an all-stock deal, which was far lower than the $750 million figure initially reported by TechCrunch. Barely two months before this acquisition, salesforce.com, inc. made its largest acquisition ever by agreeing to acquire Demandware in a $2.8 billion deal. Citing the company’s aggressive organic and inorganic growth strategy, most analysts who track the stock are currently bullish on it, including analysts at Stephens, who initiated coverage on the stock with a ‘Buy’ rating on August 2. Columbus Circle Investors was one of the hedge funds that initiated a stake in salesforce.com, inc. during the second quarter, purchasing 742,906 shares of the company.

Rail-Splitter’s top-three tech picks are revealed on the next page.

#3. Electronic Arts Inc. (NASDAQ:EA)

 – Shares Owned by Rail-Splitter Capital Management (as of June 30): 206,543

 – Value of Holding (as of June 30): $15.65 Million

Electronic Arts Inc. (NASDAQ:EA) is the only stock covered in this article in which Rail-Splitter Capital Management reduced its stake during the second quarter, albeit by just 8%. The gaming software company came out with better than expected fiscal year 2016 fourth quarter numbers in May, causing its shares to spike. Largely due to the solid gains it registered at that time, the stock is currently trading up by 12.58% year-to-date and very close to its lifetime high of $79.99. Electronic Arts Inc. (NASDAQ:EA) announced a repeat to that fantastic quarterly performance on August 2, when it reported EPS of $0.07 on revenue of $682 million for its fiscal 2017 first quarter, besting analysts’ expectations of a loss of $0.02 per share on revenue of $652.64 million. Following the company’s recent earnings release, several analysts boosted their price target on the stock, including analysts at Barclays, who raised their target to $88 from $82 while keeping their rating on the stock unchanged at ‘Overweight’. Louis Navellier’s Navellier & Associates was another hedge fund that reduced its stake in the company during the second quarter, by 23% to 210,692 shares.

#2. TransUnion (NYSE:TRU)

 – Shares Owned by Rail-Splitter Capital Management (as of June 30): 474,872

 – Value of  Holding (as of June 30): $15.88 Million

Amid a 21% rise in TransUnion (NYSE:TRU)’s stock during the second quarter, Rail-Splitter Capital Management increased its stake in the company by 23%. The consumer credit reporting company had its IPO last year at $22.50 per share and since then its stock has appreciated by over 45%, with most of those gains coming in the last four months. However, the stock has witnessed a slight correction in the last few days despite the company reporting better than expected second quarter results on July 26. While the Street had expected TransUnion (NYSE:TRU) to report EPS of $0.32 on revenue of $414.70 million for the quarter, the company declared EPS of $0.37 on revenue of $426 million. Earlier this year, TransUnion acquired healthcare services company Auditz LLC for an undisclosed sum of money. The move has been appreciated by analysts who track the stock, as they feel that it will help TransUnion to broaden its healthcare footprint. Dmitry Balyasny‘s Balyasny Asset Management initiated a stake in TransUnion during the second quarter, purchasing 60,000 shares of the company.

#1. Red Hat Inc (NYSE:RHT)

 – Shares Owned by Rail-Splitter Capital Management (as of June 30): 220,364

 – Value of Holding (as of June 30): $16 Million

Red Hat Inc (NYSE:RHT) climbed three spots in Rail-Splitter Capital’s equity portfolio during the second quarter to become its third-largest holding and top tech pick at the end of June, after the fund increased its stake in the company by 19% during the quarter. The open source software solutions company lost one-fourth of its market capitalization at the beginning of 2016 amid the aforementioned broader struggles in the global markets. Though its stock managed a recovery over the next few months, it fell again in June after the company reported its fiscal year 2017 first quarter results. Shares currently trade down by 11% year-to-date. According to several analysts, Red Hat Inc (NYSE:RHT)’s decision to announce its acquisition of API Management company 3Scale on the same day as it reported its quarterly earnings was the main reason behind its stock taking a beating that day as opposed to the company’s quarterly results. The stock currently sports an average rating of ‘Overweight’ and an average price target of $87.69 from 30 the leading analysts and research firms on the Street who track it. Other hedge funds that increased their stake in Red Hat during the second quarter included Joshua Packwood and Schuster Tanger’s Radix Partners, which lifted its holding by 23% to 4,789 shares.

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