Joel Greenblatt's 5 'Magic' Stock Picks For 2013

by: Insider Monkey

by Matt Doiron

We have been keeping track of 13F filings from hedge funds and other notable investors as they come in. Even though 13F filings are six to seven weeks old at this point (this wave of filings discloses many of a filer's long equity positions as of the end of December), we have found that it is possible to develop profitable investment strategies based on the information they contain. For example, the most popular small cap stocks among hedge funds have, on average, generated an excess return of 18 percentage points per year (read the details here).

Of course, a more obvious way to use 13Fs is to treat the stocks listed as recommendations and do more research on the company as long as it passes inspection. Joel Greenblatt of Gotham Asset Management is well known as the author of investing books including You Can Be A Stock Market Genius and the developer of the "Magic Formula" value investing strategy. Learn more about Greenblatt's investing strategy. Here are the five largest holdings by market value in his most recent 13F:

Greenblatt's top pick was Raytheon Company (NYSE:RTN), as he increased his holdings to about 300,000 shares from about 250,000 three months earlier. Raytheon and other aerospace and defense stocks are unpopular picks at the moment as investors worry about cuts to military spending. Earnings were already down 14% last quarter compared to the fourth quarter of 2011. Raytheon trades at 10 times earnings, whether we look at trailing results or at forward estimates for 2014. Aerospace and defense may be a good source of value but it's possible that Greenblatt's strategy isn't fully counting the chances of sharp spending cuts.

United Therapeutics Corporation (NASDAQ:UTHR) was another of Greenblatt's favorite stocks. The $2.8 billion market cap drug manufacturer is best known for its products which treat hypertension. Analysts expect strong earnings growth over the next several years, though investors are pricing the stock much more conservatively: the trailing P/E is 11 but the five-year PEG ratio is 0.4. While it may require a good deal of research as a healthcare stock, it may be worth looking at to see if the sell-side might be correct.

The 13F disclosed a position of about 780,000 shares in Cisco Systems, Inc. (NASDAQ:CSCO). 59 hedge funds and other notable investors in our database of 13F filings at the end of September, making it one of the ten most popular tech stocks among hedge funds (see more tech stocks hedge funds were crazy about). At 10 times forward earnings estimates, and with both sales and net income up in the fiscal quarter ending in January compared to the same period in the previous fiscal year, we would consider Cisco to be a candidate for value status.

Greenblatt has long liked GameStop Corp. (NYSE:GME) despite the struggles of the electronic game industry in general and game retailers in particular (as more and more games are purchased over the Internet). 47% of the outstanding shares are held short, even though the forward P/E is only 8; clearly many market players do not trust the analyst consensus. We would note that at current prices, Gamestop pays a fairly high dividend yield, after having started paying a dividend in February 2012 and then increasing it six months later.

Deluxe Corporation (NYSE:DLX) rounded out Greenblatt's top stock picks as he reported ownership of about 450,000 shares. The company is a $1.9 billion market cap provider of printed business products including checks, forms, and envelopes. Deluxe's stock price is up 50% in the last year, and in the fourth quarter of 2012 the company reported earnings growth of 7% versus a year earlier (top line growth was roughly similar). We like the valuation at 11 times trailing earnings and think that Deluxe might be worth further research as a value stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.