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Top 10 Stocks to Buy According to John Orrico’s Water Island Capital

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·8 min read
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In this article, we discuss the top 10 stocks to buy according to John Orrico's Water Island Capital. If you want to skip our detailed analysis of Orrico's history, investment philosophy, and hedge fund performance, go directly to the Top 5 Stocks to Buy According to John Orrico's Water Island Capital.

John Orrico earned a double major in Finance and International Management from Georgetown University. He has worked in the financial services industry since 1982, holding several jobs in finance and stock trading. Mr. Orrico launched Water Island Capital in 2000 and currently serves as the hedge fund's president and chief investment officer.

Water Island Capital is an employee-owned hedge fund management business in New York. It participates in merger arbitrage and risk arbitrage regularly. In addition, Water Island Capital focuses primarily on catalyst-driven global investment opportunities. As of the third quarter of 2021, Water Island Capital had a 13F portfolio worth $1.74 billion.

Some of the top new holdings in Water Island Capital's portfolio are MGM Growth Properties LLC (NYSE:MGP), Athene Holding Ltd. (NYSE:ATH), and Five9 Inc (NASDAQ:FIVN).

Top 10 Stocks to Buy According to John Orrico's Water Island Capital
Top 10 Stocks to Buy According to John Orrico's Water Island Capital

Source: pexels

Based on its 13F holdings for the third quarter of last year, Water Island Capital owns 596,247 shares in MGM Growth Properties LLC (NYSE:MGP), a position valued at $22.84 million on September 30. MGM Growth Properties LLC (NYSE:MGP) shares have returned 17.11% to investors over the last 12 months as of February 4.

In the third quarter, Water Island Capital added Athene Holding Ltd. (NYSE:ATH) to its portfolio, buying 61,669 shares. Apollo and Athene announced a merger on January 3, becoming Apollo Global Management, Inc. (NYSE:APO), a high-growth alternative asset manager with a market valuation of $41.39 billion.

Five9 Inc (NASDAQ:FIVN) is another mid-cap stock in Water Island Capital's portfolio. In the third quarter, Water Island Capital bought 686,798 shares of FIVN valued at nearly $110 million, making it one of the fund's top stock holdings.

Our Methodology

With this context in mind, here is our list of top 10 stocks to buy according to John Orrico's Water Island Capital. We picked these stocks from the Q3 portfolio of Mr. Orrico's hedge fund.

Stocks to Buy According to John Orrico's Water Island Capital

10. Change Healthcare Inc. (NASDAQ:CHNG)

Water Island Capital Stake Value: $67,317,000

Percentage of Water Island Capital's 13F Portfolio: 3.87%

Number of Hedge Fund Holders: 50

Change Healthcare Inc. (NASDAQ:CHNG) is a healthcare technology firm that offers revenue cycle management, payment management, and health information exchange solutions. On January 3, Piper Sandler analyst Sean Wieland increased his price target on Change Healthcare Inc. (NASDAQ:CHNG) to $26 from $25.75 and maintained an "Overweight" rating on the shares.

On February 2, Change Healthcare Inc. (NASDAQ:CHNG) posted earnings for the third quarter of $0.36, beating market predictions by $0.01. In addition, its revenue over the period was $866 million, surpassing estimates by $24.41 million.

Change Healthcare Inc. (NASDAQ:CHNG) recently saw a decrease in hedge fund sentiment. The number of long hedge fund positions declined to 50 as of the end of the third quarter, down from 51 positions in the previous quarter.

Just like MGM Growth Properties LLC (NYSE:MGP), Athene Holding Ltd. (NYSE:ATH), and Five9 Inc (NASDAQ:FIVN), Change Healthcare Inc. (NASDAQ:CHNG) is one of the conviction stock picks of John Orrico's Water Island Capital.

9. Welbilt, Inc. (NYSE:WBT)

Water Island Capital Stake Value: $76,118,000

Percentage of Water Island Capital's 13F Portfolio: 4.38%

Number of Hedge Fund Holders: 38

Welbilt, Inc. (NYSE:WBT) is a company that sells commercial food-service equipment. It creates, produces, and distributes food and beverage equipment for the commercial food-service sector worldwide. Water Island Capital holds 3.28 million shares in Welbilt, Inc. (NYSE:WBT) valued at $76.12 million. This represents 4.38% of its 13F portfolio. Water Island Capital’s stake in Welbilt, Inc. (NYSE:WBT) increased by 27% in the third quarter of 2021.

With a $259.14 million stake in Welbilt, Inc. (NYSE:WBT), Carl Icahn's Icahn Capital LP is the company's leading shareholder among the funds tracked by Insider Monkey as of the end of the third quarter of 2021. Our database shows that 38 hedge funds held stakes in Welbilt, Inc. (NYSE:WBT) at that time, down from 44 funds in the second quarter.

8. Coherent, Inc. (NASDAQ:COHR)

Water Island Capital Stake Value: $88,233,000

Percentage of Water Island Capital's 13F Portfolio: 5.07%

Number of Hedge Fund Holders: 37

Coherent, Inc. (NASDAQ:COHR) is a laser and optics company that serves the microelectronics, life sciences, industrial, aerospace, and defense industries. Among the hedge funds tracked by Insider Monkey, Pentwater Capital Management is a leading shareholder of Coherent, Inc. (NASDAQ:COHR), with 1.54 million shares worth more than $384.14 million.

Water Island Capital holds 352,804 shares in Coherent, Inc. (NASDAQ:COHR) worth over $88.23 million, representing 5.07% of its portfolio. Water Island Capital trimmed its stake in Coherent, Inc. (NASDAQ:COHR) by 5% in the third quarter of 2021. 37 hedge funds in Insider Monkey's database held long positions in Coherent, Inc. (NASDAQ:COHR) on September 30, down from 43 funds a quarter earlier.

Appleseed Fund, an investment management firm, mentioned Coherent, Inc. (NASDAQ:COHR) in its first-quarter 2021 investor letter. Here is what the fund said:

“Our most significant contributors to the Fund’s equity performance during the quarter (includes) Coherent (COHR). During the quarter, Coherent announced that it was being acquired, after which several other bidders emerged. Between the takeover announcement and the bidding war among Coherent suitors, the shares rallied strongly during the quarter.”

7. Xilinx, Inc. (NASDAQ:XLNX)

Water Island Capital Stake Value: $99,640,000

Percentage of Water Island Capital's 13F Portfolio: 5.73%

Number of Hedge Fund Holders: 62

Xilinx, Inc. (NASDAQ:XLNX) is a company that designs and develops programmable logic semiconductor devices as well as the software design tools that go with them. On January 27, Truist analyst William Stein boosted his price target on Xilinx, Inc. (NASDAQ:XLNX) to $190 from $180 but kept a "Hold" rating on the shares.

On January 26, Xilinx, Inc. (NASDAQ:XLNX) posted its results for the third quarter. The company's EPS came in at $1.29, beating estimates by $0.27. In addition, revenue over the period rose by 25.8% compared to the previous year's quarter, reaching $1.01 billion, outperforming estimates by $68.15 million.

Overall, hedge funds are loading up on Xilinx, Inc. (NASDAQ:XLNX), as 62 out of the 867 funds tracked by Insider Monkey that filed 13Fs for the third quarter held stakes in the company, compared to 59 funds a quarter earlier.

6. PPD, Inc. (NASDAQ:PPD)

Water Island Capital Stake Value: $101,666,000

Percentage of Water Island Capital's 13F Portfolio: 5.85%

Number of Hedge Fund Holders: 37

PPD, Inc. (NASDAQ:PPD) is a multinational contract research business specializing in medication development, laboratory services, and lifecycle management. PPD, Inc. (NASDAQ:PPD) was acquired by Thermo Fisher Scientific Inc. (NYSE:TMO), the world leader in providing scientific instruments, for $17.4 billion on December 8, 2021.

37 hedge funds held stakes in PPD, Inc. (NASDAQ:PPD) at the end of the third quarter of 2021, worth $1.89 billion, compared to the same number of funds in the preceding quarter holding stakes in PPD, Inc. (NASDAQ:PPD) totaling $1.91 billion. The company's most significant stakeholder among those funds is Pentwater Capital Management with 10.64 million shares worth $497.85 million.

Similar to MGM Growth Properties LLC (NYSE:MGP), Athene Holding Ltd. (NYSE:ATH), and Five9 Inc (NASDAQ:FIVN), PPD, Inc. (NASDAQ:PPD) is one of John Orrico's favorite investments precisely because of its acquisition potential, which was realized in December.

In its second-quarter 2021 investor letter, DEVON Equity Management mentioned PPD, Inc. (NASDAQ:PPD). Here is what the fund said:

“…We expect the ~US$4bn of ‘excess’ free cash flow generated from COVID related business to be reinvested into high returning businesses with a more sustainable earnings profile. This is already evident in Thermo’s strong M&A activity YTD, culminating in the US$20bn acquisition of PPD (PPD US).

PPD is a top tier CRO (Contract Research Organisation) which has been in and out of private equity ownership in recent times. To oversimplify, CRO’s effectively provide ‘outsourced’ R&D services across the entire customer spectrum (from big pharma to early stage biotech). Their value proposition varies slightly be customer, but ultimately comes down to quality of drug discovery / development and accelerating time to market (i.e. ‘Return on R&D investment’). CROs must stack up well on this metric vs in-house R&D spend, otherwise Firms would simply keep the spend 100% internal.”

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Disclosure: None. Top 10 Stocks to Buy According to John Orrico's Water Island Capital is originally published on Insider Monkey.