By Matt Doiron
We have found that the most popular small-cap stocks among hedge funds, as determined by an analysis of quarterly 13F filings, outperform the S&P 500 by an average of 18 percentage points per year (see the details here). This demonstrates that the information in 13F filings can be used to develop profitable strategies. We also like to analyze the top stock picks from many 13Fs so that investors can decide if these stocks are good prospects for their own portfolio and therefore worthy of further research. We looked through the filing from billionaire Paul Singer's Elliott Management (check out our full list of Elliott's stock picks) and here are our thoughts on the fund's five largest holdings by market value as of the end of December:
Delphi Automotive PLC (DLPH) was Singer's top pick as his hedge fund owned over 25 million shares of the auto components company specializing in electrical and electronic parts. At 12 times trailing earnings, Delphi looks cheap (as do many other auto related stocks) due to the market consensus of industry weakness. Sell-side projections, however, are quite rosy and as a result the stock price is only a multiple of 8 on consensus earnings for 2013 and in line with a five-year PEG ratio of 0.7. Fellow billionaire Dan Loeb's Third Point reported a position of 10 million shares in its own filing for the fourth quarter of 2012 (find Loeb's favorite stocks).
Elliott initiated a position of over 13 million shares in BMC Software, Inc. (BMC), a $5.8 billion market cap enterprise software company. In the fiscal quarter ending in December - the third of BMC's fiscal year - net income was down 11% compared to the same period in the previous fiscal year despite a 6% increase in revenue. Wall Street analysts believe that performance will improve dramatically in the next couple of years and so the forward P/E (for the fiscal year ending in March 2014) is only 10. While the stock doesn't look like a good value in terms of current performance, it may be worth looking into what the analysts are seeing.
The fund was also buying News Corp (NWSA) (NWS) between October and December, closing 2012 with a little over 10 million shares in its portfolio. News Corp is set to be broken in two this year, and many hedge funds see this as an opportunity: the breakup may create shareholder value as management of the new companies becomes better able to focus on the unique aspects of their own businesses rather than the organization as a whole. This has often been found to be the case for spinout situations. News Corp's trailing price-to-earnings multiple is only 17, so only limited efficiencies would be quite positive for investors.
Elliott had made an offer to acquire Compuware Corporation (CPWR) and bought a number of shares of the stock in order to support its bid. While the company rejected the proposed transaction, it has recently been reported that Compuware is actually now looking to sell itself and so the hedge fund could realize a very large gain on this investment. Compuware is a $2.5 billion market cap enterprise software company. Thanks in part to Elliott's move and the continued speculation of an acquisition, the stock price is up 35% in the last three months.
Nexen Inc. (NXY) completed the list of Singer's top five stock positions as of the end of December. Nexen is already well on its way to being acquired by Chinese oil company CNOOC. The U.S. and Canadian governments (Nexen is best known for its acreage in the tar sand of Alberta) have already approved the deal despite political concerns in some quarters. As a result there might not be much remaining upside for investors who are just beginning to look at the stock, hedge funds following merger arbitrage strategies have bid up the stock price by quite a bit.