By Matt Doiron
Even though hedge fund 13F filings are a bit outdated by the time they are released, they can still be useful for investors. For example, the most popular small cap stocks among hedge funds tend to outperform the S&P 500 by 18% per year (see more details about hedge funds' small cap picks). We also like to look at the favorite stocks of top investors and provide a brief analysis of each name so that anyone interested in these recommendations can make a more informed decision about whether or not to research them further. Steve Cohen has become a billionaire through his successful management of SAC Capital Advisors, which had about $14 billion in assets under management before a recent round of withdrawals after the fund was brought into an insider trading investigation. Read on for our quick take on SAC's largest single-stock holdings by market value and compare them to previous filings.
The fund's favorite stock was paint and finish company Sherwin-Williams Company (SHW), with SAC reporting a position of 1.6 million shares. Sherwin-Williams is up 64% in the last year, possibly thanks to a stronger housing market driving more frequent renovation and home improvement activity (home improvement retailers such as Home Depot (HD) and Lowe's (LOW) have also been solid performers in the market). The stock now carries trailing and forward P/E multiples of 25 and 17, respectively. While earnings growth has been very high in percentage terms, sales growth has been more modest (up 7% last quarter compared to the fourth quarter of 2011).
SAC also liked News Corp (NWSA), more than doubling the size of its position in the media company to a total of 9.6 million shares. Many other hedge funds have also been building up positions in News Corp ahead of the breakup of the company, on the thesis that broken-up companies - similarly to spinouts - become better able to focus on operations without having to concern themselves with a fuller range of businesses.
Cohen and his team were also buying shares of eBay Inc (EBAY) during the fourth quarter of 2012, and closed December with 4.6 million shares in the portfolio. Paypal and the payments business have been a source of strength for eBay, but its core business has also been a solid performer. In total sales were up 18% in the fourth quarter of 2012 compared to the same period in the previous year. Analysts expect $2.72 in earnings per share for 2013, which implies a current-year P/E of 21. We would prefer to see it a bit cheaper but given eBay's improvement on the top line it might be worth taking a closer look at the company.
The fund also moved heavily into Facebook Inc (FB). Its stake had been fairly small at the end of September, but SAC entered 2013 with a position of 8.5 million shares. A number of other hedge funds were also buying Facebook Inc last quarter, making it one of the five most popular technology stocks among hedge funds (see more tech stocks hedge funds loved). This is one case where we don't see what the hedge funds are seeing: Facebook Inc has significant growth opportunities but thus far they have only come accompanied by higher costs and even a rosy analyst consensus implies a forward P/E of 36.
Schlumberger (SLB) rounded out Cohen's top five stock picks for the fourth quarter of 2012. The oil and gas equipment and services company reported moderate revenue growth in Q4 versus a year earlier, with net income declining slightly. The trailing P/E of 19 indicates that the market expects significant earnings growth over the next few years, while Schlumberger is something of a market leader and it does have growth prospects from higher drilling activity, we think that investors should at least compare it to smaller, cheaper peer Halliburton before buying.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.