Cerrano Capital, the $750 million hedge fund launched at the end of last year had a solid fourth quarter. According to the firm’s fourth quarter, and first full quarter letter to investors, a copy of which has been reviewed by ValueWalk, Cerrano returned 5.15% net for the period.
Founded by York Capital alumnus Michael Weinberger, Carrano was launched with much fanfare at the end of last year as the firm attracted some big names including Third Point’s Dan Loeb along with York founder Jamie Dinan and Chief Investment Officer Dan Schwartz according to Bloomberg.
Cerrano Capital reportedly set out with $750 million of capital, $500 million from outside investors and $150 million from Weinberger's family and friends.
Cerrano Capital: Up 5.2% Likes Undervalued Mid Caps
Long/short equity fund Cerrano runs a concentrated portfolio according to the firm's letter, with 20 to 30 core long positions. Despite this concentration, the fund only had two positions which gave a loss during the quarter, neither of which exceeded 42 basis points.
Despite the market's current high level, Weinberger and team believe that running "slightly more robust gross and net exposures" is justified for several reasons. For a start, the letter notes that the firm is not "investing in averages" and there are still pockets of value to be found where the risk/reward profile is attractive. Second, the team at Cerrano continues to see opportunity in the mid-cap space, which files under the radar of most investors as "several mega-stocks take the indices higher." And finally, the team believes that the round of Trump tax cuts is a "bigger deal" than most people thought as there is a "pep in the corporate step" that has not been seen for some time. The degree of optimism has "surprised" Weinberger and his analysts.
With these tailwinds helping equities, the portfolio was fully invested coming out of January 2018 as there is "no shortage of interesting investment opportunities."
One such opportunity is Dycom Industries, which Cerrano profiled at the Robin Hood Conference in mid-October 2017. The firm believes that this company is set to benefit from the new tax plan more than most because it is currently a 1) full taxpayer, 2) revenues are 100% domestic, 3) it will not compete on price and 4) many of the company's largest clients (AT&T/Comcast) have already promised to invest more in their infrastructure following the new tax plan.
Dycom is a key player in the wireline/wireless connectivity space and the "desperate need" for fiber to be installed throughout the country over the next decade to two will lead to much-improved demand for the company's services. With an owner-operator and the ability to profit handsomely from the "Fourth Industrial Revolution," Cerrano believes the stock can double over the next few years as it only trades at less than 8x EBITDA.
Cerrano Capital - other picks
The hedge fund also likes XPO Logistics, Coty, Cellnex SM, Juniper Networks (JNPR), Aetna, and Yoox Net-a-Porter (YNAP).
The hedge fund bought Time Warner after the DOJ blocked the AT&T acqusition. Cerrano Capital compared that purchase to a much larger position they have established in Aetna, which they see cheap as standalone position in the unlikely (in their view) event that the CVS is not approved.
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