Crispin Odey founded long-based hedge fund Odey Asset Management in 1991. After having gone through its fair shares of up-and-downs over the years, the fund has grown to have an equity portfolio of $1.26 billion as of September 30, on the back of good stock selection and solid risk management. Given Odey Asset Management’s solid track record and its extensive research abilities, let’s take a closer look at the fund’s top picks heading into this quarter, which were D.R. Horton, Inc. (NYSE:DHI), Amazon.com, Inc. (NASDAQ:AMZN), Goldman Sachs Group Inc (NYSE:GS), Deutsche Bank AG (USA) (NYSE:DB), and American Airlines Group Inc (NASDAQ:AAL).
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 38 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
#5 American Airlines Group Inc (NASDAQ:AAL)
– Shares held (as of September 30): 1.54 million
– Total Value (as of September 30): $59.88 million
Odey raised its position in American Airlines Group Inc (NASDAQ:AAL) by 43% in the third quarter. American Airlines recently reported record earnings on the back of low fuel prices. Given OPEC’s December 4 decision to increase its production quota to 31.5 million bpd from the previous 30 million, many investors believe crude will stay lower for longer, meaning American Airlines’ income will be healthy for the foreseeable future. American Airline’s healthy profits should translate into big share buybacks that will shrink the float. American Airlines shares trade at 7.5-times forward earnings estimates.
#4 Deutsche Bank AG (USA) (NYSE:DB)
– Shares held (as of September 30): 2.58 million
– Total Value (as of September 30): $69.53 million
Odey was buying the dip in Deutsche Bank AG (USA) (NYSE:DB), as the fund hiked its position in the German investment bank by 48% during the July 1-to-September 30 period. Deutsche Bank shares are down by 13.7% year-to-date because of a stagnant European economy and large third-quarter write-offs. In response, new co-CEO John Cryan has suspended the dividend for two years and plans to cut the company’s workforce by 35,000. The customary extravagant bonuses for top executives may also be a thing of the past. Bulls hope Deutsche Bank’s restructuring will increase the company’s return on capital and stock price. Shares trade at 8.5-times forward earnings estimates.