By Jake Mann
There are few names as synonymous with the term "hedge fund billionaire" as Ray Dalio. Dalio's Bridgewater Associates is one of the largest funds of its kind in the world, and its equity portfolio has a total vale of nearly $10 billion. Our research has shown that hedge funds' top consensus picks beat the market significantly, so it's important to delve into Dalio's favorite stock picks as of his latest fourth quarter 13F filing.
In total, the hedge fund's 13F portfolio holds more than 200 stocks, and its largest position is in Microsoft (MSFT). Dalio upped his exposure to the tech giant by 4% last quarter, and shares have rewarded the move in 2013 thus far, rising by nearly 5%. Joining Bridgewater in Microsoft is a host of prominent billionaires, including Ken Fisher (see full portfolio) and Jim Simons.
While many of its peers are facing slowing earnings growth, analysts actually expect Microsoft's bottom line expansion to accelerate over the coming half-decade, averaging annual growth of 8-9%. With a dividend yield above 3%, income-seeking investors are also in the fold, and Wall Street's average price target on MSFT shares predicts an upside of close to 18% from current levels.
Apollo Group (APOL) takes the No. 2 spot in Dalio's equity portfolio, and the hedge fund manager upped his position in the private education company by 88% last quarter. Dalio doubled his stake in Q3 as well, which is a sentiment that runs contrary to many investors' general bearishness on the for-profit sector. All risks of a value-trap aside, Apollo Group offers obvious value at 6.2 times earnings and 0.5 times sales, though the sell-side expects earnings to shrink for at least the next two years.
CVS Caremark (CVS), meanwhile, was Dalio and Bridgewater's third favorite stock at the end of last quarter. CVS was a new position for the fund in Q3, and in Q4, it upped its stake in the pharmacy benefits manager by a whopping 1,001%. Part of this bet is likely a result of CVS's ability to retain more Walgreen (WAG) customers than was originally expected, and a flu epidemic gives another reason to be bullish on this space.
At 11.6 times forward earnings and a modest PEG of 1.3, CVS shares appear to have more room to run, despite the fact that they've already gained 5.6% year-to-date. The Street's average price target on this stock rests about 13% higher than CVS's current share price near the $51 mark. In addition to Dalio, hedgie peers like Charles de Vaulx and Cliff Asness are two of the strongest supporters of CVS; it's difficult to disagree with this consensus.
Hewlett-Packard (HPQ) is next up on our list, and despite its location in Dalio's portfolio, the position was actually downsized by about 10% last quarter. Hewlett-Packard has seen one high-level executive snatching up shares over the past 90 days, and since this round of purchasing activity began, HPQ's stock has risen 30.9%. This appreciation is attributable to a range of factors, most notably: (1) increasingly pertinent rumblings of a break up, and (2) a couple of key bullish valuations from JPMorgan (JPM) and Bernstein. Though its ultimate fate remains uncertain, value-seekers can find solace in this stock at a mere 1.5 times book and 0.3 times sales.
Last but certainly not least, CA, Inc. (CA) rounds out Ray Dalio's top five. CA's dividend yield of 4% makes it just one of 9 tech stocks listed in the S&P 500 to treat investors with such a payout. The enterprise IT company has already risen more than 13% year-to-date, and shares still trade at a forward P/E below 10x and a moderate PEG of 1.6. There may not be world-beating value here, but the income is attractive to almost every investor in today's market, and a generally optimistic macroeconomic environment -- particularly for enterprise IT -- should provide a nice tailwind. Wall Street analysts seem to think so, as their average price target on CA represents a 4-5% upside from current levels.
Disclosure: I am long MSFT.