Jeffrey Gates is known for his expertise in high-yield bond research and has an experience of over 25 years in this. In 1996, Gates founded Gates Capital Management, an “event-driven alternative asset manager,” which targets corporate dislocation events for making its picks. According to its latest 13F filing with the SEC, Gates Capital holds an equity portfolio of $3.01 billion, with the top 10 holdings accounting for 62.84% of the total value. The hedge fund has its largest investments in industrial and consumer discretionary sectors followed by materials sector, on which we are going to focus. Gates’ top holdings in the materials sector are represented by Eagle Materials, Inc. (NYSE:EXP), Mercer International Inc. (NASDAQ:MERC), and W. R. Grace & Co (NYSE:GRA).
Why are we interested in the 13F filings of a select group of hedge funds? We use these filings to determine the top 15 small-cap stocks held by these elite funds based on 16 years of research that showed their top small-cap picks are much more profitable than both their large-cap stocks and the broader market as a whole. These small-cap stocks beat the S&P 500 Total Return Index by an average of nearly one percentage point per month in our backtests, which were conducted over the period of 1999 to 2012. Moreover, since the beginning of forward testing from August 2012, the strategy worked just as our research predicted, outperforming the market every year and returning 123% over the last 35 months, which is more than 65 percentage points higher than the returns of the S&P 500 ETF (SPY) (see more details).
Material stock investments account for nearly 23% of the overall portfolio of Gates Capital with Eagle Materials, Inc. (NYSE:EXP) representing the largest holding. The hedge fund has strengthened its position in Eagle Materials by 45% during the second quarter to 2.45 million shares valued at $186.81 million. Eagle Materials, Inc. (NYSE:EXP) is a manufacturer of gypsum wallboard and cement. In its latest financial results, Eagle Materials, Inc. (NYSE:EXP) reported revenue of $285.0 million, up by 7% on the year and earnings per share flat on the year at $0.75 for the first quarter of fiscal 2016. However, the results came lower than expectations of $0.88 in EPS on revenue of $315.9 million. The company also raised the its share repurchase program last week to 7.5 million shares, which represent 15% of its outstanding common stock. Robert Bishop’s Impala Asset Management is another shareholder of Eagle Materials, Inc. (NYSE:EXP) with 1.01 million shares as of the end of June.