By Matt Doiron
We have been analyzing the most recent round of 13F filings from hedge funds and other notable investors, which disclosed many of their long equity positions in U.S. stocks as of the end of December. Even though this data is a bit outdated, we think there are still a few ways for investors to make use of it. We have found that the most popular small-cap stocks among hedge funds - as determined by these filings - outperform the S&P 500 by 18 percentage points per year on average (read more about hedge fund small-cap picks) and we believe that it's possible to identify other strategies. We can also see what hedge fund managers' favorite stocks were in a number of categories including those meeting traditional value criteria. Here are billionaire and Tiger Cub Andreas Halvorsen's Viking Global's five largest holdings in stocks with both trailing and forward P/E multiples of 15 or lower (or see the full list of Viking Global's stock picks):
One of Viking Global's top picks overall was Capital One Financial Corp. (COF) after increasing the size of its position by 36% to almost 14 million shares. Lone Pine Capital, which is managed by fellow billionaire Tiger Cub Stephen Mandel, initiated a position of 4.4 million shares in Capital One during the fourth quarter of 2012 (find Mandel's favorite stocks). Capital One trades at 9 times trailing earnings, which is in line with many large banks (Capital One operates a bank as well as a credit card company) and the stock also trades at a discount to the book value of its equity. We think it is worth considering as a value stock.
The fund also liked ACE Limited (ACE), a $30 billion market cap property and casualty insurance company. Its position at the beginning of 2013 was 5.5 million shares. ACE is valued at 11 times earnings whether we consider its net income for 2012 or forward earnings estimates. While recent growth rates have been quite modest, the multiples are low enough that the company needs to do very little in order to justify its current valuation. As a result ACE is another possible value stock though we'd also want to look to see if any peers might be better buys.
LyondellBasell Industries NV (LYB) was another of Viking Global's stock picks with the 13F disclosing a position of 7.5 million shares. The chemicals and refining company is dependent on macro factors for demand, with the result being a high beta of 2.5. The sell-side is projecting high earnings growth over the next couple years, and as such the trailing and forward P/Es are 13 and 9 respectively. However, at least on the top line LyondellBasell's growth rate was quite limited last quarter compared to the fourth quarter of 2011. It might be better to at least start with other chemical companies.
Halvorsen and his team more than doubled their stake in Humana Inc (HUM) and owned 3.5 million shares at the end of December. Humana's stock price is down 21% in the last year, and business performance seems about flat with little change in sales or net income in the fourth quarter of 2012 versus a year earlier. Health insurers are generally cheap, and so even though Humana's trailing P/E is only 9 it's another case where we would advise investors to compare the stock to alternatives in the industry.
The filing reported that Viking Global had bought about 580,000 shares of AutoZone, Inc. (AZO) after not owning any at the end of September. The auto parts store carries a beta of only 0.2, signifying that it operates almost independently of the overall economy. The flip side to that is that AutoZone only experienced a slight increase in earnings in its most recent quarter compared with the same period in the previous year and has risen only 1% since a year ago (underperforming the market). Analyst consensus for the fiscal year ending in August 2014 has AutoZone's forward P/E at 12.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.