5 Key Bets Made By This Billionaire’s Subsidiary Hedge Fund

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Hedge funds are often thought of as solely being an investment tool for elite investors capable of risking millions, but there are also ways for the general public to piggyback off of their picks. We track 450 of the world’s top-tier hedge fund managers, and for more than a decade in our back tests, our small-cap strategy beat the market by 18% a year. Since we've started sharing these picks with the public, it has outpaced the S&P 500 by more than 20 percentage points (learn how here), indicating that ardent investors pay attention to the smart money.

With this in mind, it's important to analyze each of the funds we track individually, and by using the latest round of fourth quarter 13F data from the SEC, we can see how they were preparing for 2013. Let's take a look at one fund in particular: Catapult Capital Management, a subsidiary hedge fund of Israel Englander’s Millennium Management.

Sitting at No. 1 in Catapult’s equity portfolio is RPM International (NYSE: RPM). The Rust-Oleum maker outperformed the S&P 500 and DJIA at the start of the year but has since been lagging both indices after tumbling 7% on February 21st following a disappointing earnings report. The company reported EPS of $0.31 a share versus a 38-cent total for the same quarter last year. Although RPM is slowly climbing off the $29.50 mark, it continues to underperform the major indices. Fortunately, shares should benefit from the overall good will being poured onto paint manufacturers—Sherwin-Williams (SHW) and Valspar (VAL), for example—as the home-improvement segment shows very respectable growth.

Coming in at No. 2 in Catapult’s top five is PPG Industries (NYSE: PPG). Better-than-expected earnings have been a boost to Mr. Market’s perception of this stock, and the company’s product and geographical diversity enables it to be well positioned for continued growth.  The sell-side expects EPS growth to flirt with 15% next year before settling into an 8-9% average through at least 2017. This is worth noting because bottom line expansion averaged just above 3% a year over the past half-decade. PPG has certainly had a bumpy start to the year and is currently underperforming the S&P 500 and DJIA, but there is general expectation among analysts that this gap will start to tighten by the third quarter.

Considering the growth potential of this stock, it’s hard to believe that Monsanto (NYSE: MON) is third in Catapult’s top five instead of first. Although the past year or two have been somewhat eventful—and not in a good way—for the agriculture-biotechnology behemoth, it continues its steady and consistent climb over the $100 per share mark.

A recent decision by the U.S. Supreme Court protecting Monsanto’s second-generation seeds as intellectual property clears the path for continued dominance over competitors such as DuPont (DD), for example. DuPont, by the way, lost a $1 billion settlement to Monsanto for producing genetically altered soybeans that were protected by Monsanto’s technology—a key point investors should be aware of. The only other serious competitor in this market besides DuPont is Syngenta (SYT), which has been plagued by investigations into the safety of its pesticides and herbicides. 

Next up at No. 4 we have CF Industries Holdings (NYSE: CF). It would seem that anything related to agriculture couldn’t lose this year, but CF had its nose bloodied following recent downgrades from Dahlman Rose and Feltl & Co. Now, other fertilizer producers Potash Corp (POT) and Rentech Nitogen (RNF) have also seen analyst pressure of late, and CF’s downgrade may simply be guilt by association—it still has very strong fundamentals and has managed to control its production costs. Still, the latest selloff was so severe that CF is now trading more than 8% below the S&P 500 on the year.    

Rounding out this hedge fund’s equity “fab five” at No. 5 is Eastman Chemical (NYSE: EMN).  Eastman Chemical manufactures many of the chemicals used in packaging, fibers and even disposable diapers. Of the major players in this market, including Dow Chemical (DOW), PPG, and Celanese Corp (CE), Eastman has continually outperformed all three as well as the S&P 500 when we stretch this time frame to at least three months in the past. After the market-wide selloff in late February, a buying opportunity for Eastman looks to have emerged, and the stock has been showing sizable, albeit uneven, gains. Catapult’s bullishness—it upped its stake in Eastman by 194% last quarter—is an important point to consider when analyzing the company’s investment prospects.

In short, it’s easy to see that this subsidiary-structured hedgie is very optimistic about all things chemical-related. Eastman, PPG and RPM offer coverage of a diverse group of chemical products, while Monsanto and CF Industries are focused on agriculture chemicals. By holding this mixture, Catapult Capital can gain exposure to Ag’s generally bullish long-term outlook, while using the remaining trio as a way to protect against any potential downside. 

This article is written by Amy Thielen and edited by Meena Krishnamsetty. InsiderMonkey has no position in any stocks mentioned. The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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