By: Jake Mann
In the hedge fund world, 13F filing season is here and we couldn't be more excited. As money managers' fourth quarter holdings are made public, we'll bring you their biggest movers, shakers and everything in between. It's crucial to follow hedge fund sentiment because our research shows if you know where to look, top-tier funds do beat the market (see how here).
While the portfolios we'll cover are from several weeks ago, empirical studies indicate that 13F filings' 45-day delay actually improves investors' ability to beat the market. This is because, on average, hedgies are early into their investments. So, without further ado, let's take a peek under the hood of one of the industry's most notable funds - Whitney Tilson's T2 Partners.
T2 Partners has a focus on financial and technology stocks, so it's fitting that three of its top five Q4 holdings lie within these sectors. The hedge fund's newest No. 1 stock pick is Berkshire Hathaway (BRK.B). Tilson upped his stake in the mammoth holding company by 11% last quarter, and now holds more than 100,000 BRK.B shares for the first time since Q4 2011.
Berkshire's solid return on equity (7.7%) and profit margin (8.9%) metrics are obviously attractive, and T2 Partners cited in December that the company's class A shares are "26% below intrinsic value of $180,000, close to a multi-decade low." A similar conclusion can be reached when looking at Berkshire's class B shares, and it's also worth noting that the company's earnings currently trade at an 8% discount to their five-year historical average.
American International Group (AIG), meanwhile, was a new pick for T2 Partners in the first quarter of last year, a full six months before many of his peers - like George Soros (see full portfolio) and David Tepper - decided to show confidence in the insurer. This bet has paid off handsomely for Tilson and the rest of his investment team, as shares of AIG have gained 30.3% since the end of Q1 2012. Post-bailout, AIG is a meaner, leaner insurer, and it still trades at a bargain-bin 0.56 times its book value. It's difficult to ignore Tilson's bullish sentiment here.
Next up, we have Howard Hughes Corp. (HHC), the real estate operator that Tilson discussed at length while speaking at last year's Value Investing Congress. The fund manager is primarily bullish on Howard Hughes because of the value of four particular properties in: South Street Seaport, Las Vegas, Houston and Honolulu, Hawaii. Tilson believes that these assets, among others, were placed on Howard Hughes's books at undervalued prices, some due to past bankruptcies. Broadly speaking, this stock trades at an 18% discount to the real estate industry's average book valuation as well.
Despite its continued swoon, Apple (AAPL) is still a top five position for Whitney Tilson, though it's worth noting that the hedgie downsized his holdings in the tech giant by 6.4% last quarter. Like the companies discussed above, Apple presents an intriguing value play at current levels, to say the least. Shares of the company trade at a paltry PEG near 0.5, and a dividend yield above 2% is decent. Still, it may be best if Apple can capitalize on its enormous cash hoard by boosting its dividend or share repurchase program, and it appears that the company's so-called "secret" hedge fund may be preparing for such a move.
It's also important to understand that Apple actually reported an "adjusted" EPS growth of 7% last quarter (yoy), despite the fact that most members of the financial press reported this growth as "flat" or "slightly lower." The reason this issue arose is because Apple's latest Q1 was a length of 13 weeks, while last year's Q1 was a longer 14-week period. Though this difference is simple, many investors missed it.
Looking at the longer term, the sell-side still expects Apple to generate annual EPS growth of 18-19% over the next half-decade. Obviously, there are plenty of positives here for momentum, value and income-seeking investors alike.
Last but certainly not least, Netflix (NFLX) rounds out T2 Partners' latest top five, and it has rewarded Tilson handsomely since the start of 2013. Shares of the streaming content provider have nearly doubled year-to-date on the back of an epic earnings beat, and there are still plenty of reasons to be bullish.
We've detailed these arguments here on Seeking Alpha, and they boil down to the fact that: (1) Carl Icahn and NFLX management are still having discussions on value creation, (2) Netflix's content library beats its competitors in breadth and efficiency (i.e., its ability to choose content via big data), and (3) streaming revenues as a percentage of the company's total base is increasing significantly.
Each of these stocks above represents a solid play moving forward, and they have strong support from Whitney Tilson's T2 Partners to boost investors' confidence.