Richard L. Haydon’s Tipp Hill Capital Management LLC is a New York-based hedge fund founded in July 2009. Formerly known as Yield Capital Partners (Y/Cap Management), under which its filings are still listed, the fund has a two-pronged investment strategy: first, a value-oriented long/short approach and second, an approach targeting investments driven by catalysts such as M&As, spin-offs, or managerial changes. The former strategy focuses on companies with strong free cash flow generation, among other factors, and has an investment horizon of one-to-three years and a target return of 50% within two years, while investments under the latter approach last less than a year, with an annual return target of 20-30%. With its latest 13F out, it turns out that Tipp Hill is more bullish than ever on airline stocks such as Delta Air Lines, Inc. (NYSE:DAL), American Airlines Group Inc (NASDAQ:AAL), Republic Airways Holdings Inc. (NASDAQ:RJET), and United Continental Holdings Inc (NYSE:UAL). All together, the four airlines make up almost a quarter of Tipp Hill’s equity portfolio. With an eye to the fundamentals, let’s take a closer look at these four airlines and Tipp Hill’s investment in them.
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 that 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 have managed to return 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
#4 Republic Airways Holdings Inc. (NASDAQ:RJET)
Shares held (as of September 30): 754,000
Total Value (as of September 30): $4.36 million
Percent of Portfolio (as of September 30): 4.46%
Republic Airways Holdings Inc. (NASDAQ:RJET)’s shares are down by an unsightly 61.8% year-to-date after the company missed analysts’ expectations for three straight quarters. The regional airline also recently ran into some trouble with another airline, Delta, which sued Republic Airways for failing to provide a full schedule of flights as previously promised. Delta is claiming direct damages of at least $1 million. Not all is lost, however. Analysts still think the company will be profitable next year, giving it a reasonable forward P/E of 9.82. If management can execute and crude prices don’t rally, Republic Airways Holdings could make a comeback. Ross Margolies‘ Stelliam Investment Management owns 5.01 million shares.
#3 United Continental Holdings Inc (NYSE:UAL)
Shares held (as of September 30): 94,000
Total Value (as of September 30): $4.99 million
Percent of Portfolio (as of September 30): 5.11%
United Continental Holdings Inc (NYSE:UAL) is down by 15% year-to-date on industry capacity concerns. Investors worry that the current boom times in the airline industry could cause airlines to overbuild and lead to oversupply in the future. The airline industry has certainly overbuilt multiple times before, although this time may be more suited to doing so, as the industry is more consolidated. Given United Continental Holdings’ forward P/E of 6.56, it seems the market has already priced in a great deal of the risk. The position was a new one for Tipp Hill, and landed as the eighth most-valuable long position in its portfolio as of September 30. Thomas E. Claugus‘ GMT Capital owns 6.77 million shares as of June 30.
The top two airline stock picks of Tipp Hill can be found on the following page.