In this article, we discuss the top 10 stocks to buy according to John Orrico’s Water Island Capital.
John Orrico earned a double major in Finance and International Management from Georgetown University. He has worked in the financial services industry since 1982, holding several jobs in finance and stock trading. Mr. Orrico launched Water Island Capital in 2000 and currently serves as the hedge fund’s president and chief investment officer.
Water Island Capital is an employee-owned hedge fund management business in New York. It participates in merger arbitrage and risk arbitrage regularly. In addition, Water Island Capital focuses primarily on catalyst-driven global investment opportunities. As of the third quarter of 2021, Water Island Capital had a 13F portfolio worth $1.74 billion.
Some of the top new holdings in Water Island Capital’s portfolio are MGM Growth Properties LLC (NYSE:MGP), Athene Holding Ltd. (NYSE:ATH), and Five9 Inc (NASDAQ:FIVN).
Source: pexels
Based on its 13F holdings for the third quarter of last year, Water Island Capital owns 596,247 shares in MGM Growth Properties LLC, a position valued at $22.84 million on September 30. MGM Growth Properties LLC shares have returned 17.11% to investors over the last 12 months as of February 4.
In the third quarter, Water Island Capital added Athene Holding Ltd. to its portfolio, buying 61,669 shares. Apollo and Athene announced a merger on January 3, becoming Apollo Global Management, Inc. (NYSE:APO), a high-growth alternative asset manager with a market valuation of $41.39 billion.
Five9 Inc is another mid-cap stock in Water Island Capital’s portfolio. In the third quarter, Water Island Capital bought 686,798 shares of FIVN valued at nearly $110 million, making it one of the fund’s top stock holdings.
Our Methodology
With this context in mind, here is our list of top 10 stocks to buy according to John Orrico’s Water Island Capital. We picked these stocks from the Q3 portfolio of Mr. Orrico’s hedge fund.
Stocks to Buy According to John Orrico’s Water Island Capital
10. Change Healthcare Inc. (NASDAQ:CHNG)
Water Island Capital Stake Value: $67,317,000
Percentage of Water Island Capital’s 13F Portfolio: 3.87%
Number of Hedge Fund Holders: 50
Change Healthcare Inc. (NASDAQ:CHNG) is a healthcare technology firm that offers revenue cycle management, payment management, and health information exchange solutions. On January 3, Piper Sandler analyst Sean Wieland increased his price target on Change Healthcare Inc. to $26 from $25.75 and maintained an “Overweight” rating on the shares.
On February 2, Change Healthcare Inc. posted earnings for the third quarter of $0.36, beating market predictions by $0.01. In addition, its revenue over the period was $866 million, surpassing estimates by $24.41 million.
Change Healthcare Inc. recently saw a decrease in hedge fund sentiment. The number of long hedge fund positions declined to 50 as of the end of the third quarter, down from 51 positions in the previous quarter.
Just like MGM Growth Properties LLC, Athene Holding Ltd., and Five9 Inc, Change Healthcare Inc. is one of the conviction stock picks of John Orrico’s Water Island Capital.
9. Welbilt, Inc. (NYSE:WBT)
Water Island Capital Stake Value: $76,118,000
Percentage of Water Island Capital’s 13F Portfolio: 4.38%
Number of Hedge Fund Holders: 38
Welbilt, Inc. (NYSE:WBT) is a company that sells commercial food-service equipment. It creates, produces, and distributes food and beverage equipment for the commercial food-service sector worldwide. Water Island Capital holds 3.28 million shares in Welbilt, Inc. valued at $76.12 million. This represents 4.38% of its 13F portfolio. Water Island Capital’s stake in Welbilt, Inc. increased by 27% in the third quarter of 2021.
With a $259.14 million stake in Welbilt, Inc., Carl Icahn’s Icahn Capital LP is the company’s leading shareholder among the funds tracked by Insider Monkey as of the end of the third quarter of 2021. Our database shows that 38 hedge funds held stakes in Welbilt, Inc. at that time, down from 44 funds in the second quarter.
8. Coherent, Inc. (NASDAQ:COHR)
Water Island Capital Stake Value: $88,233,000
Percentage of Water Island Capital’s 13F Portfolio: 5.07%
Number of Hedge Fund Holders: 37
Coherent, Inc. (NASDAQ:COHR) is a laser and optics company that serves the microelectronics, life sciences, industrial, aerospace, and defense industries. Among the hedge funds tracked by Insider Monkey, Pentwater Capital Management is a leading shareholder of Coherent, Inc., with 1.54 million shares worth more than $384.14 million.
Water Island Capital holds 352,804 shares in Coherent, Inc. worth over $88.23 million, representing 5.07% of its portfolio. Water Island Capital trimmed its stake in Coherent, Inc. by 5% in the third quarter of 2021. 37 hedge funds in Insider Monkey’s database held long positions in Coherent, Inc. on September 30, down from 43 funds a quarter earlier.
Appleseed Fund, an investment management firm, mentioned Coherent, Inc. in its first-quarter 2021 investor letter. Here is what the fund said:
“Our most significant contributors to the Fund’s equity performance during the quarter (includes) Coherent (COHR). During the quarter, Coherent announced that it was being acquired, after which several other bidders emerged. Between the takeover announcement and the bidding war among Coherent suitors, the shares rallied strongly during the quarter.”
7. Xilinx, Inc. (NASDAQ:XLNX)
Water Island Capital Stake Value: $99,640,000
Percentage of Water Island Capital’s 13F Portfolio: 5.73%
Number of Hedge Fund Holders: 62
Xilinx, Inc. (NASDAQ:XLNX) is a company that designs and develops programmable logic semiconductor devices as well as the software design tools that go with them. On January 27, Truist analyst William Stein boosted his price target on Xilinx, Inc. to $190 from $180 but kept a “Hold” rating on the shares.
On January 26, Xilinx, Inc. posted its results for the third quarter. The company’s EPS came in at $1.29, beating estimates by $0.27. In addition, revenue over the period rose by 25.8% compared to the previous year’s quarter, reaching $1.01 billion, outperforming estimates by $68.15 million.
Overall, hedge funds are loading up on Xilinx, Inc., as 62 out of the 867 funds tracked by Insider Monkey that filed 13Fs for the third quarter held stakes in the company, compared to 59 funds a quarter earlier.
6. PPD, Inc. (NASDAQ:PPD)
Water Island Capital Stake Value: $101,666,000
Percentage of Water Island Capital’s 13F Portfolio: 5.85%
Number of Hedge Fund Holders: 37
PPD, Inc. (NASDAQ:PPD) is a multinational contract research business specializing in medication development, laboratory services, and lifecycle management. PPD, Inc. was acquired by Thermo Fisher Scientific Inc. (NYSE:TMO), the world leader in providing scientific instruments, for $17.4 billion on December 8, 2021.
37 hedge funds held stakes in PPD, Inc. at the end of the third quarter of 2021, worth $1.89 billion, compared to the same number of funds in the preceding quarter holding stakes in PPD, Inc. totaling $1.91 billion. The company’s most significant stakeholder among those funds is Pentwater Capital Management with 10.64 million shares worth $497.85 million.
Similar to MGM Growth Properties LLC, Athene Holding Ltd., and Five9 Inc, PPD, Inc. is one of John Orrico’s favorite investments precisely because of its acquisition potential, which was realized in December.
In its second-quarter 2021 investor letter, DEVON Equity Management mentioned PPD, Inc.. Here is what the fund said:
“…We expect the ~US$4bn of ‘excess’ free cash flow generated from COVID related business to be reinvested into high returning businesses with a more sustainable earnings profile. This is already evident in Thermo’s strong M&A activity YTD, culminating in the US$20bn acquisition of PPD (PPD US).
PPD is a top tier CRO (Contract Research Organisation) which has been in and out of private equity ownership in recent times. To oversimplify, CRO’s effectively provide ‘outsourced’ R&D services across the entire customer spectrum (from big pharma to early stage biotech). Their value proposition varies slightly be customer, but ultimately comes down to quality of drug discovery / development and accelerating time to market (i.e. ‘Return on R&D investment’). CROs must stack up well on this metric vs in-house R&D spend, otherwise Firms would simply keep the spend 100% internal.”
5. Nuance Communications, Inc. (NASDAQ:NUAN)
Water Island Capital Stake Value: $108,313,000
Percentage of Water Island Capital’s 13F Portfolio: 6.23%
Number of Hedge Fund Holders: 61
Nuance Communications, Inc. (NASDAQ:NUAN) is a Burlington, Massachusetts-based multinational computer software technology firm that sells voice recognition and AI-based software. Segantii Capital, with approximately 7.62 million shares worth $482.81 million, is the largest shareholder of Nuance Communications, Inc. among the funds tracked by Insider Monkey.
Water Island Capital started building its position in Nuance Communications, Inc. in the second quarter of 2021 and increased its stake in the company by 36% to 1.97 million shares in the third quarter, accounting for 6.23% of the value of its 13F portfolio.
At the end of the third quarter of 2021, 61 hedge funds tracked by Insider Monkey held stakes totaling $4.87 billion in Nuance Communications, Inc., down from 72 in the preceding quarter, which were valued at $5.58 billion.
In its third-quarter 2021 investor letter, Rhizome Partners mentioned Nuance Communications, Inc.. Here is what the fund said:
“We also exited our small position in Nuance upon Microsoft’s acquisition. Nuance is a leader in voice recognition software, with dominant market share, and its speech-to-text product is the gold standard in radiology. In addition, by eliminating the need for note taking and allowing doctors to focus on patient care, Nuance could transform the way doctors treat patients. We built a 1% position in Nuance after attending its comprehensive investor day. Our view is that if Nuance can successfully grow its voice-recognition software in doctor’s offices, it could be worth multiples of our cost basis. Microsoft’s acquisition eliminated the multi-bagger upside but also partially validates the belief that Nuance is a high-quality technology company. We exited Nuance with a 62% gain in less than a year. This example is representative of the slight adjustments we made to our portfolio construction. We will allocate to small bets on technology and high-growth companies that could increase our exposure to “right tail” upside. Rest assured that our focus is still roughly 50% real estate, 30% high-quality companies trading at cheap multiples of free cash flow, and the rest in investments with the potential for growth and higher upside.”
4. Five9, Inc. (NASDAQ:FIVN)
Water Island Capital Stake Value: $109,709,000
Percentage of Water Island Capital’s 13F Portfolio: 6.31%
Number of Hedge Fund Holders: 76
Five9, Inc. is a company that sells cloud contact center software. On February 1, William Blair analyst Matt Stotler initiated coverage of Five9, Inc., rating the stock as “Outperform”. According to the analyst, Five9 has a remarkable capability to support and grow client connections.
John Orrico’s Water Island Capital initiated a new stake in Five9, Inc. in the third quarter of 2021, buying 686,798 shares of the company worth $109.71 million. Panayotis Takis Sparaggis’ Alkeon Capital Management is the biggest stakeholder of Five9, Inc. among the funds tracked by Insider Monkey, with 3.01 million shares worth $480.68 million.
Hedge funds are loading up on Five9, Inc., as Insider Monkey’s data shows that 76 hedge funds held a stake in the company as of the end of the third quarter of 2021, up from 45 funds in the preceding quarter.
ClearBridge Investments, an investment management firm, had this to say about Five9 in its first-quarter 2021 investor letter:
“Five9 is a cloud-based contact center as a service software provider that is replacing aging on-premise legacy solutions that dominate the installed base. Companies are being forced to modernize and cloud penetration is still low; Five9 is positioned to benefit and should see further growth driven by its cross-selling add-on modules and an AI product that generates high revenue.”
3. Kansas City Southern (NYSE:KSU)
Water Island Capital Stake Value: $123,354,000
Percentage of Water Island Capital’s 13F Portfolio: 7.1%
Number of Hedge Fund Holders: 59
In December 2021, Canadian Pacific Railway Limited (NYSE:CP) acquired Kansas City Southern (NYSE:KSU) for $31 billion. On January 27, Canadian Pacific Railway Limited’s fourth-quarter EPS came in at C$0.95, below the estimates by C$0.02.
On December 20, Evercore ISI analyst Jonathan Chappell initiated coverage of Canadian Pacific Railway Limited, upgrading the stock to “Outperform” from “In-Line”, and giving it a price target of $85 after the company’s proposed merger with Kansas City Southern.
At the end of the third quarter of 2021, 59 hedge funds tracked by the database of Insider Monkey held stakes worth $4.32 billion in Kansas City Southern, down from 61 in the preceding quarter totaling $3.30 billion.
In its first-quarter 2022 investor letter, Miller/Howard Investments discussed Kansas City Southern, detailing its stance on the firm. Here is what the fund said:
“Canadian Pacific Railway (CP) agreed to acquire Kansas City Southern (KSU) in the largest rail deal in over a decade. The merger will create the first rail network connecting Canada, the US, and Mexico, and it should benefit from the passage of the USMCA Trade Agreement. We initiated a position in KSU in Q4 as we expected it to benefit from growing North American trade and viewed it as a consolidation candidate.”
2. IHS Markit Ltd. (NYSE:INFO)
Water Island Capital Stake Value: $133,995,000
Percentage of Water Island Capital’s 13F Portfolio: 7.71%
Number of Hedge Fund Holders: 64
IHS Markit Ltd. (NYSE:INFO) serves customers in the business, financial, and government sectors by providing information, analytics, and solutions. On January 21, IHS Markit Ltd. posted earnings for the third quarter of $0.85 per share, beating market estimates by $0.01. In addition, revenue for the quarter was $1.18 billion, up by 6.3% from the previous year’s third-quarter revenue.
On January 24, BMO Capital analyst Jeffrey Silber trimmed his price target on IHS Markit Ltd. to $118 from $142 and reiterated a “Market Perform” rating on the shares. Silber stated that his reduced target price reflected the projected acquisition value of S&P Global.
The number of hedge funds tracked by Insider Monkey having stakes in IHS Markit Ltd. grew to 64 in Q3, from 61 in the preceding quarter. These stakes hold a consolidated value of $6.72 billion, up from $5.95 billion.
In its Q1 2021 investor letter, Artisan Partners mentioned IHS Markit Ltd.. Here is what the fund said:
“We ended our campaign in IHS Markit. IHS Markit is a global provider of information services to the financial services, automotive and energy sectors. Since beginning our investment campaign in 2009, we have been attracted to the company’s position relative to the meaningful secular tailwind driving demand for data and analytics to help guide business decisions. The company announced in Q4 it is merging with S&P Global, one of the largest credit ratings agencies globally and a provider of benchmarks, data and analytics to the global capital and commodities markets. We believe the combination provides a good level of cost and revenue synergies which will help drive profit growth, and S&P Global has a solid track record of acquiring and integrating new businesses. However, we exited our position as the combined entity will be well beyond our mid-cap market cap mandate.”
1. Willis Lease Finance Corporation (NASDAQ:WLFC)
Water Island Capital Stake Value: $138,033,000
Percentage of Water Island Capital’s 13F Portfolio: 7.94%
Number of Hedge Fund Holders: 2
Willis Lease Finance Corporation (NASDAQ:WLFC) is a company that specializes in commercial aircraft and aircraft engines. Water Island Capital added Willis Lease Finance Corporation to its portfolio in the third quarter of 2021 by purchasing 593,794 shares.
Out of the hedge funds being tracked by Insider Monkey, Water Island Capital is a leading shareholder of Willis Lease Finance Corporation. It was one of the only two hedge funds monitored by Insider Monkey that were bullish on Willis Lease Finance Corporation as of the end of the third quarter of 2021. The stakes of those two funds are valued at $150.98 million.
Be sure to also check out the Top 10 Stock Picks of Samuel Isaly’s OrbiMed Advisors and 11 Mining Stocks to Buy Now According to David Iben’s Kopernik Global Investors
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This article is originally published at Insider Monkey.
