In a follow-up to our report, The Best and Worst Hedge Fund Stocks of 2016, we look at the top five and provide some market context.
2016, as most readers are surely aware, was generally another tough year for the hedge fund industry. The stage was set early with the market fracas in January, from which many funds were unable to recover, though the market itself rebounded by the middle of the following month. In a headwind-oriented environment such as this, there are of course the contrarian trends that defied the general environment and can provide insight into what has gone well for the industry. We’ll take a look at one of those here: the stocks in which we saw the most alpha generated across our Novus Hedge Fund Universe.
CHARTER COMMUNICATIONS (CHTR) Return: 38.53%, Selection: 22.81 BPS
We don’t think it will be a surprise to see this merger-name-turned-long-play atop the list. Many managers are invested in some size, making Charter one of the most crowded names in our Hedge Fund Universe (rated in the 95th percentile of crowded names). Soroban, Egerton, SPO, and Tiger maintain sizable positions as a % of their publicly-reported assets, among a number of other managers. Looking at ownership a different way, Charter is the single largest position in our Hedge Fund Universe, comprising 0.90% of the entire portfolio. This is potentially much larger if one considers the multitude of ways the name is being played (via Liberty or otherwise).
After the merger with Time Warner and Bright House, this has been at least partially an earnings story. Though profits missed revenue projections in Q3, Charter solidly beat estimate forecasts in Q2, and this was enough to continue to send the name upwards into 2017.
NVIDIA CORP (NVDA) Return: 194.63%, Selection: 9.47 BPS
In many ways, Nvidia, the best performer on the NASDAQ in 2016, is a very different name than Charter. It’s only 0.15% of our HFU, and is much less crowded at a 70th percentile crowdedness ranking. Some of the funds holding sizable positions are Gladstone, Ziff Brothers, and Rock Creek Group.
However, it’s similar to Charter in one key way: analysts see Nvidia having a unique position in its market space—artificial intelligence and gaming. The stock ripped in the second half of 2016, rising from $40 around April to over $100 by year end. The company has made such a name for itself that the CEO of Nvidia, Jen-Hsun Huang, gave the preshow address to open CES in Las Vegas on January 5th, where the firm announced self-driving partnerships with Audi and Mercedes, after announcing a similar partnership with Tesla in October. The firm received a California testing permit for autonomous driving in December.
RESTAURANT BRANDS INTL (QSR) Return: 23.96%, Selection: 8.92 BPS
QSR is another name that closed 2016 near an all-time high, having been on a hot streak since the market tumult in January of last year. It has consistently beat earnings each quarter since the Burger King and Tim Horton’s merger.
Restaurant Brands is a 0.13% name in our HFU. The most well-known owner is Pershing Square, with a position over 30%. Other funds holding a sizable position of QSR include Stillwater, Valiant, and Palestra. The US listing of QSR is among the most crowded in our universe (99th percentile), which is a risk that invested funds need to monitor heading into 2017. Finally, because the incoming Trump administration nominated CKE Restaurants CEO Andy Puzder to lead the labor department, Restaurant Brands might find a sympathetic ear in the new administration and continue to be a name to watch.
COMCAST CORP (CMCSA) Return: 24.11%, Selection: 6.63 BPS
Comcast, also known as The Cable Company Not Permitted to Purchase Time Warner, also makes our list. It’s more widely-held than NVDA or QSR at 0.46% of our HFU, but trails the popularity of Charter. It also avoids heavy crowding like its cable counterpart, coming in the 88th percentile of names in our universe. Comcast is a sizable position for the likes of Lansdowne and Egerton in the UK, as well as BlueSpruce, Veritas, and Lakewood in the US.
The allure of the name appears based on its improved positioning for a 5G/cord cutting world, as well as on the strength of NBCU and the acquisition of DreamWorks, which carries series like the Fast and the Furious—almost guaranteed blockbusters. Based on that, one might expect CMCSA to continue playing a large role in hedge fund portfolios throughout most of 2017 as well.
UNITED HEALTH (UNH) Return: 37.16%, Selection: 6.08 BPS
United Health rounds out our top list. A mainstay around 0.20% of our HFU throughout the year, UNH is also the only healthcare name on our list, which is likely correlated with poor performance in the sector. It’s the 2nd least crowded in our top five, with a crowdedness score in the 82nd percentile, though it is among the more broadly held with 105 HF owners. Among the funds that have a significant allocation to United Health based on percentage of reported assets are Veritas, Asymmetry, and Saddle Road Partners.
Toward the end of the year, the name offered strong guidance, with continued strength following in the stock price, ending the year at a high. For UNH, as well the rest of the underperforming healthcare, the potential repeal/replace of the ACA will be one of the key issues for 2017.
For more of the best stocks for 2016, download our report, The Best and Worst Hedge Fund Stocks of 2016. In this report, you’ll also find aggregate sector performance, individual sector performance, and the worst hedge fund stocks for 2016.Published on January 19, 2017