By Matt Doiron
We have spent the last couple weeks going through 13F filings from hedge funds and other notable investors. One technique we use to help retail investors benefit from this information is by looking for how well different categories of stocks tend to perform. For example, the most popular small cap stocks among hedge funds produce an average excess return of 18 percentage points per year (see the details here). The most intuitive use of a 13F, however, is to use them as a source of ideas. We have gone through the most recent filing from billionaire Michael Price's MFP Investors and here are our thoughts on the five largest positions in the hedge fund's portfolio (or see the full list of Price's stock picks):
1.7 million shares of West Coast Bancorp (WCBO) made that company MFP's largest holding; this figure was unchanged from three months earlier. West Coast Bancorp's market cap is only about $450 million, but the current stock price is over $23 and an average of over 80,000 shares are traded daily making for close to $2 million in daily dollar volume. In terms of earnings, West Coast Bancorp has not been performing well recently and its earnings multiples are actually quite high. The stock price has risen 43% in the last year.
Price's position in Intel Corporation (INTC) ticked up slightly to a total of 1.7 million shares. Intel trades at 10 times earnings, whether we consider trailing results or analyst consensus for 2014. This pessimism - the stock is down 24% in the last year - is due to concerns that a declining PC industry will hit the chipmaker hard. The company did report 27% lower earnings last quarter compared to the fourth quarter of 2011. While we wouldn't be too positive on the industry, it's possible that Intel could be a value play and with a high dividend as well, we think investors could be well served by doing more research on the company rather than dismissing it out of hand.
MFP moved heavily into Citigroup Inc. (C) during the fourth quarter of 2012, closing December with about 800,000 shares in its portfolio. Citi was one of the five most popular stocks among hedge funds during the quarter (find more stocks hedge funds loved, including a new #1). The value case for Citigroup is that its current price represents a considerable discount to the book value of the equity, as the P/B ratio is 0.7. The company's financials have been showing some improvement, though we think that some other large banks such as JPMorgan Chase might be more reliable and therefore worth their premium in terms of value metrics.
Alleghany Corporation (Y) was another of the fund's top picks with MFP owning almost 90,000 shares at the beginning of 2013, about even with the number of shares that had been owned at the end of Q3. Alleghany is a $6.4 billion market cap property and casualty insurance company. As with many other insurance companies its exposure to the broader economy is limited with a beta of 0.6. The market capitalization about matches the book value of Alleghany's equity.
The fifth largest stock position in Price's portfolio was roughly 510,000 shares of The McGraw-Hill Companies, Inc. (MHP). McGraw-Hill is another company in an industry - publishing, in this case - which is threatened by trends in consumer electronics, and has seen a small decline in its stock price in the last year. Sales fell 19% in the fourth quarter of 2012 versus a year earlier. Analysts are quite optimistic here, with expected earnings growth over the next several years implying a forward earnings multiple of 13 and a five-year PEG ratio of 0.8. We're not sure what the bullish case here is - it's possible that a value opportunity is being overlooked, but we wouldn't consider McGraw-Hill a priority.