Hedge Fund Alpha The Best Stock Picks of The Best Hedge Funds Q1 2013 Issue:4 Performance Update: Small-Cap Strategy Inside This Issue We published the first issue of our newsletter at the end of August and started sharing the 15 quarterly stock picks of our small-cap strategy. Our 1 Performance Update strategy is pretty straight forward to implement. We hold these stocks in 3 New Stock Picks our portfolio for about 3 months and update our portfolio with the new names as soon as we publish a new issue of the newsletter. Our Small 5 In-depth Analysis of New Stock Cap Strategy gained an average of 47.5% between September 4th and Picks May 15th. During the same time period S&P 500 index ETF (SPY) gained only 19.1%. The Small Cap Strategy also returned 12.6% between 35 22 Billionaire Fund February 15th and May 16th, beating SPY’s 9.2% return by 3.4 percentage Managers points. 79 Most Popular Stocks Among Hedge Funds Here is how each of our small-cap picks from the last newsletter performed: Least Popular Stocks Among 86 Hedge Funds 1. United Rentals (URI): 4.8% 89 Most Popular Stocks Among 2. Gardner Denver (GDI): 9.1% Best Performing Hedge Funds 3. MetroPCS (PCS): 14.4%, This stock was acquired by TMUS on May 1st 90 Most Concentrated Positions Among Hedge Funds 4. Visteon (VC): 13.6% 5. W.R. Grace (GRA): 7.5% 92 30 Picks by Our New Bonus 6. Lear (LEA): 7.9% Mid Cap Strategy 7. Owens Corning (OC): 3.1% 92 15 Stocks That are Dumped 8. Genworth Financial (GNW): 17.1% by Hedge Funds 9. Abercrombie & Fitch (ANF): 5.1% 10. Allscripts Healthcare Solutions (MDRX): 25.1% 11. Brookdale Senior Living (BKD): 4.0% 12. Ocwen Financial (OCN): 8.4% 13. US Airways (LCC): 31.9% 14. Hillshire Brands (HSH): 14.9% Don’t pay hedge funds 15. Sally Beauty Holdings (SBH): 13.8% hefty fees when you can buy the best stock picks Historically this strategy beat the S&P 500 index by about 4.25 of best hedge fund percentage points per quarter and its performance over the last 8.5 managers at a fraction months was twice as good. of what they charge 2 Hedge Fund Alpha Performance Update: Secret Strategy Historically our secret strategy performed much better than the market. In our 10-year back test this strategy beat the S&P 500 index by 2 percentage points per month. It is a riskier strategy than our small-cap strategy though. Our secret strategy gained 25.2% between September 4th and May 16th. Overall this strategy outperformed the S&P 500 index by 6.1 percentage points in 8.5 months. This is a very good result in comparison to what most hedge funds and mutual funds deliver. However, it is also clear that this strategy has been performing below its historical track record. Secret Strategy beat the Here is how our stock picks from the previous quarter performed S&P 500 index by 2 during the last 3 months: percentage points per month in our 10-year 1. ADT Corp (ADT): -9.6% back test. This strategy 2. Realogy Holdings (RLGY): 20.6% returned 25.2% between 3. Gardner Denver (GDI): 9.1% September 4th and 4. NYSE Euronext (LAMR): 9.1% February 15th 5. Workday Inc (WDAY): 33.2% 6. Verisign (VRSN): 5.9% 7. PBF Energy (PBF): -18.0% 8. Spirit Realty Capital (SRC): 14.6% 9. National Bank Holdings Corp (NBHC): 0.1% 10. Dynegy (DYN): 18.8% 11. MetroPCS (PCS): 14.4%, This stock was acquired by TMUS on May 1st 12. LinnCo (LNCO): 4.1% 13. WhiteWave Foods (WWAV): 26.0% 14. Warnaco Group (WRC): NA, It was acquired by PVH Corp on Feb. 13th 15. Grupo Financero Sntdr (BSMX): 14.3% In the next page you will find the stock picks of our small-cap and secret strategies. You will notice that secret strategy has a much higher turnover than the small-cap strategy. All 15 stock picks of the secret strategy are new stocks. On the other hand there are only 9 new stocks in the small-cap strategy. This means our small-cap strategy has lower transaction costs than our secret strategy. 3 Hedge Fund Alpha New Stock Picks: Small-Cap Strategy 1. United Rentals (URI) 2. Visteon Corp. (VC ) 3. Lamar Advertising Co. (LAMR) 4. US Airways Group (LCC) 5. W.R. Grace & Co. (GRA) 6. MetroPCS Communications, Inc. (PCS) 7. Owens Corning (OC) 8. CommonWealth REIT (CWH) 9. Newcastle Investment Corp. (NCT) 10. Fortinet Inc. (FTNT) 11. Carter's, Inc. (CRI) United Rentals (URI) 12. Genworth Financial (GNW) 13. Lear Corp. (LEA) has been the most 14. Dean Foods Company (DF) popular small-cap stock 15. Community Health Systems (CYH) among hedge funds in our first three issues of our newsletter. It returned 78% during New Stock Picks: Secret Strategy the last 8.5 months. 1. Axiall Corporation (AXLL) 2. CommonWealth REIT (CWH) 3. Starz (STRZA) 4. Radian Group Inc. (RDN) 5. Constellation Brands Inc. (STZ) 6. Community Health Systems (CYH) 7. American Realty Capital Properties (ARCP) 8. NXP Semiconductors NV (NXPI) 9. Newcastle Investment Corp. (NCT) 10. Norwegian Cruise Line Holdings (NCLH) 11. Bright Horizons Family Solutions (BFAM) 12. Ulta Salon, Cosmetics & Fragrance (ULTA) 13. Copart, Inc. (CPRT ) 14. BMC Software (BMC) 15. Emeritus Corp. (ESC) 4 Hedge Fund Alpha How To Use This Hedge Fund Newsletter 1. I don’t have time to trade in and out of stocks every quarter and I want to invest in only the best ideas. What should I do? Don’t read the rest of this newsletter. Our 10-year historical analysis showed that the top 3 small-cap stocks among hedge funds beat the market by 284 basis points per month. The top 5 small-cap stocks among hedge funds beat the market by 220 basis points per month. The good thing about investing in these top 3-5 stocks is that they stay in our portfolio for relatively long periods of time. This means lower transaction costs and you will have more time to spend on other things. United Rentals (URI) has been the most popular small-cap stock since the inception of our strategy and this stock gained 78% during the past 8.5 months. Visteon (VC) is another stock that was consistently among the top 5 stocks and it returned 39% We will start publishing over the same time period. a monthly BONUS newsletter in June. This The downside of this approach is that it isn’t diversified enough. Usually it isn’t a will cost $149 for non- good idea to allocate a large chuck of your portfolio to a very small number of members but for the stocks. current premium 2. You present a lot of strategies and lists in this newsletter. What is your members it is FREE. “official” recommendation? Which strategy should we follow? Our flagship strategy is the Small Cap Hedge Fund Strategy. Our premium members are free to do whatever they like but we suggest they buy the 15 stocks picked by our flagship strategy every quarter and sell the stocks that drop out of the list. We have a graph on almost every page on our website showing the performance of this strategy since its inception. We will also take a much closer look at these stocks in the next section. 3. Investing is a hobby for me. I have a lot of time on my hands and would like to come up with great investment ideas by looking at what hedge funds are doing. What do you recommend? We provide tons of information for subscribers who want to dig deeper and come up with additional promising stock picks. We present a lot of lists (and the historical returns of each list) at the end of this newsletter. You can also analyze the portfolios of billionaire hedge fund managers. However, we should warn you that usually it’s not a great idea to imitate hedge funds’ all stock picks. For example David Einhorn’s large-cap stock picks significantly underperform his small-cap stock picks. We will start distributing a monthly bonus newsletter where we will focus on a single hedge fund manager and share his promising stock picks with you. This newsletter will be free for our premium members. 5 Hedge Fund Alpha Analysis of Small Cap Strategy’s Picks: 1. United Rentals (URI) United Rentals has been our #1 pick for the past year. A very peculiar case of a construction/industrial equipment rental company that's booming to a greater degree than its industry: the prime rental equipment market (non- residential construction) is considered moderate (at best) by most economists, and the majority don't expect a complete recovery until 2014- 2015. One major trend, though, that was an effect of the last recession was a push away from buying construction equipment to renting instead. The latest sequester fears have pushed URI--the largest equipment rental company in the world--to even greater heights, as businesses have placed an even greater premium on short-term rental agreements. Current Price: $58.68 1) Special Situations: No Price when first recommended: $32.31 2) Short Interest: 17.6% of float is short. This percentage itself has increased by nearly 50% since the end of March; URI's first-quarter revenues missed (Aug 31, 2012) targets ever so slightly, which may explain the rising short interest. No major Dividends Paid: 0 investors have proclaimed they're short.