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.
- 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|
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|
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|
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.