Michael Lowenstein‘s Kensico Capital recently submitted its 13F for the reporting period of March 31, 2015. According to the SEC filing, the firm had a public equity portfolio value of $5.06 billion, an increase from $4.60 billion at the end of 2014, while the fund has $7.43 billion in assets under management. The employee-owned hedge fund uses a strategy that focuses on a value-driven investment approach, choosing stocks and investing heavily on its top picks. In the quarter, the company’s top three picks constituted 37.96% of its portfolio value while its top ten constituted 76.57%. Kensico Capital was co-founded by Thomas Coleman and Michael Lowenstein in 2000 and has seen significant growth since. After considering the activities and investment trends of the company, we realized that the firm, even with its enormous growth still focuses heavily on small-cap stocks to fully leverage its investment potential. As a result, we’ll take a look at its top three small-cap picks for the second quarter, which are WebMD Health Corp. (NASDAQ:WBMD), Echostar Corporation (NASDAQ:SATS), and National General Holdings Corp (NASDAQ:NGHC).
Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 144% over the ensuing 32 months, outperforming the S&P 500 Index by nearly 85 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.
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The top small-cap pick of Kensico Capital is WebMD Health Corp. (NASDAQ:WBMD). The fund’s SEC filing revealed that it held a total of 4.69 million shares of the company, with a value of $205.64 million, the position unchanged from the previous reporting period. The online health information company sports a profit margin of 7.76% and a return-on-assets of 5.11%. WebMD Health Corp. (NASDAQ:WBMD) has grown fast over the years and has become a target of many investors. Its first quarter 2015 results showed that the company realized $0.22 in earnings per share, the same as analysts’ consensus estimate. One thing that has drawn many investors to the company is its profitability. In the quarter, its profit jumped 60% as a result of a double-digit increase in traffic, thus increased income from advertisements. WebMD Health Corp. (NASDAQ:WBMD) expects between $8.5 million and $9.5 million in net income for the current quarter compared to Thomson Reuters’ estimate of $8.49 million for the same quarter. The company has also forged working relationships with companies like Microsoft Corporation (NASDAQ:MSFT) and News Corp (NASDAQ:NWSA) to make access to health information easier. Other hedge funds that had stakes in the stock include Healthcor Management LP and Michael Doheny‘s Freshford Capital Management, which had 1.30 million shares, a 14% increase during the first quarter.
Kensico Capital’s owns 1.74 million shares of its second small-cap pick, Echostar Corporation (NASDAQ:SATS), with the position worth $89.91 million. The global satellite services provider is expected to grow in earnings at an average rate of 5% per year until 2017. This year, several analysts forecast a 3.93% increase in earnings compared to last year. Next year, Echostar Corporation (NASDAQ:SATS) is expected to realize even bigger growth of 11.62% over the current year. The company released its first quarter 2015 results on May 7, posting $0.36 in earnings per share compared to $0.14 during the same quarter the previous year. A keen look at the stock reveals that the stock has been on a downward trend within the last four months, having gone down by about 3%. Some of the 29 hedge funds that had stakes in the stock for the quarter are Altalis Capital Partners, Foundation Asset Management, and Richard Patton‘s Courage Capital, all of which sold off parts of their positions in the company.
Lastly, Kensico Capital owns a total of 2.23 million shares of National General Holdings Corp (NASDAQ:NGHC) valued at $41.66 million. The company delivered an impressive performance last year of 106.2% growth in earnings per share. The firm, operating within the Property & Casualty Insurance space, is expected to perform even better this year. While many investors normally shy away from growth stocks when it comes to long-term strategies, a stock that has a great potential in its area of business is a great pick, and that’s why National General Holdings Corp (NASDAQ:NGHC) could be a big target for investors. The company is expected to register 28.7% growth in earnings per share for the year and has a long-term estimated growth rate of 15%. Analysts’ estimates on the stock have gone higher within the past month, with Zacks giving the company a “Buy” recommendation. Some of the metrics that make the stock a valuable one include its 0.89 in price-to-forward sales, a forward PE of 11.11 and its estimated $1.73 in earnings per share for the 2015 fiscal year. For the first quarter of 2015, the company delivered $0.41 in earnings per share, beating analysts’ consensus estimate of $0.35. This represented improvement compared to the same quarter last year when the stock posted $0.32 in earnings per share. A few of the hedge funds that currently hold shares of the company are Michael Blitzer‘s Kingstown Capital Management, Michael Thompson‘s BHR Capital, and Corsair Capital Management.
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