Top Merger Stocks Held By Fund Managers (Mid-Q2 2016 Edition)

by: Special Situations and Arbs


Form 13-F filings reveal fund managers' top arbitrage stocks.

Top deal stocks of the 37 funds I follow.

Airgas: Top merger stock holding as of the end of Q1 2016.

I have been following the top hedge funds that primarily invest in merger arbitrage stocks for as long as I can remember. While no fund or manager is perfect, knowing the merger stocks that these funds hold and the ones they avoid can be valuable information. Since I published my research here on SA in two recent quarters, I have been asked by several readers on this site to make this a permanent quarterly article, and I am happy to oblige.

In addition, it was suggested to me to find a way to make it easier to search on the merger arbitrage blog for older posts. By making the blog an extension of this quarterly article, it will be easy to know the time frame when looking for past comments. This one, for instance, will start from mid-Q2 2016 and end in mid-Q3 2016.

Some rules:

  • I only count a stock if it is at least 1% of the fund's portfolio.
  • I only include stocks that are still actively trading.
  • I only choose funds where the vast majority of the positions are merger-related.

For the quarter ending March 31, 2016, Airgas (ARG) was the top merger arbitrage stock of the 37 funds I track. Airgas, which is being acquired by Air Liquide in a deal slated to close later this month, showed up in 20 of the funds.

EMC Corporation (EMC) was held in 17 of the funds. Dell is in the process of taking EMC private in the largest ever takeover of a technology company.

Also in the top five is Starwood Hotels & Resorts Worldwide (HOT). Marriott (NYSE:MAR) won a bidding war for its rival, beating out China's Anbang. 14 of my funds owned Starwood as of March 31.

When I compile this data, I also try to notice which arb stocks are missing from the funds. Hutchinson Technology (NASDAQ:HTCH) and The Phoenix Companies (NYSE:PNX) are two of the deal stocks that don't make up at least 1 percent of any of the funds I follow. I don't think the omission of these names is that relevant, however, since they are small companies. I have found that the large funds stay away from many of the smaller deals, since the liquidity would prevent them from building a large position without moving the stock price. Only one fund has Cigna (NYSE:CI) in its portfolio (again, 1% or more to qualify), which is surprising. The recent Pfizer (NYSE:PFE)/Allergan (NYSE:AGN) blowup and the 90 percent decline in Valeant Pharmaceuticals (NYSE:VRX) have made it easy for funds to avoid the biopharmaceutical stocks.

Top 10 Merger Arb Stocks held by Funds

1) Airgas 20 funds
2) EMC 17 funds
3) Time Warner Cable (TWC) 17 funds
4) Starwood 14 funds
5) Baxalta (BXLT) 11 funds
6) KLA-Tencor Corp. (NASDAQ:KLAC) 10 funds
7) Yahoo (NASDAQ:YHOO) 8 funds
8) The Valspar Corp. (NYSE:VAL) 7 funds
9) Humana (NYSE:HUM) 7 funds
10) Alere (NYSE:ALR) 7 funds
Click to enlarge

When a funds makes a stock its top pick, I take notice. Here are this quarter's top picks of the 37 funds. Note: If a fund's number one position has closed earlier in the quarter, such as PartnerRe (NYSE:PRE), I am not including it.

Top Positions among the 37 Funds

Time Warner Cable Largest position in 4 funds
Columbia Pipeline Group (NYSE:CPGX) Largest position in 2 funds
EMC Largest position in 1 fund
Click to enlarge

High Percentage of a Fund

Occasionally, funds that specialize in merger arbitrage will concentrate their portfolios. Recent 13-F filings reveal that several funds, as of March 31, 2016, have large bets on some merger stocks.

Time Warner Cable 18% of a fund
Cablevision 16% of a fund
Columbia Pipeline Group 16% of a fund
Time Warner Cable 15% of a fund
Carmike Cinemas (NASDAQ:CKEC) 15% of a fund
Baxalta 14% of a fund
EMC 13% of a fund
Click to enlarge

I use all the above information as a supplement to my own research and work, which consists of reading filings, watching the tape and using options to establish positions.

Disclosure: I am/we are long EMC, HOT, TWC, CVC, BXLT, ALR, PNX, HTCH, CKEC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.