Over the last few weeks, we’ve taken an in-depth look at hedge funds.
You’ve learned how to see what the billionaires are buying and how to decrypt their elusive trading strategies through their 13F filings.
But, as you know, not all hedge funds are created equal.
Direxion Investments tracks 16 of the nation’s top-performing funds in its iBillionaire Index, and the vast majority posted negative one-year returns.
However, two of them did manage to beat the market this year – and they may have the blueprint for success in 2016.
The two outperforming iBillionaire funds are Appaloosa Management (3.8% gain) and Trian Fund Management (2.6% gain). Their winning formula for 2015?
Consumer discretionary and staples plays.
As Americans pocketed big savings at the pump, these funds cashed in on increased consumer spending. But let’s take a closer look at where they’re putting their money for next year.
Follow the Leaders
Appaloosa Management’s biggest third-quarter buy was Delta Air Lines Inc. (DAL).
David Tepper’s fund scooped up 1.8 million shares of Delta, effectively doubling its holding. Delta now makes up 9.6% of Appaloosa’s total long equity portfolio.
The company trades at just nine times forward earnings – a 22% discount to the industry. Currently, Delta has a price-to-sales ratio of 1.0 times – a 44% discount to the S&P 500 Index (1.8 times).
But what separates Delta most from competitors is outsized earnings growth.
Delta projects a 26% increase in year-over-year earnings for 2016, thanks to record-low oil prices. Analysts expect its closest competitor, JetBlue Airways Corp. (JBLU), to grow at 15%, barely more than half of Delta’s projection.
From a technical perspective, shares are trending upward with strength. In September, Delta’s chart produced a “golden cross” – a cross of the 50-day moving average over the 200-day moving average.
This is a typically bullish indicator for traders. And shares are pounding at the door of their 52-week high. Time to get on board.
Distributing the Goods
Trian Management’s largest buy in the third quarter was Sysco Corp. (SYY). Nelson Peltz’s firm tripled its existing position, adding more than 31 million shares to the portfolio. At present, the Sysco position comprises 13.8% of Trian’s portfolio.
Sysco is North America’s largest distributor of food and related products, and the company provides goods and services to 425,000 customers across the continent.
Over the last five years, the company has lagged in earnings per share, revenue, and share price growth versus the industry.
But Trian, a well-known activist hedge fund, specializes in turning around underperforming companies – particularly food services. And Sysco certainly fits the bill.
Peltz advocates deep cost-cutting and innovative solutions to boost revenue growth. He’s also not afraid to suggest unpopular spinoffs or outright sales to rivals.
Now, shares currently trade at 37 times trailing earnings – a hefty premium to both the food industry and the S&P 500.
But while Sysco isn’t the best bargain, investors love Peltz’s boardroom prowess. Since announcing his stake in August and his election to the board of directors, the stock has gained 15%.
Sysco is a solid turnaround play for aggressive investors who are willing to exercise patience to get paid big.
On the hunt,