By Matt Doiron
Ken Heebner founded Capital Growth Management in 1990 and the fund has performed quite well since then. Heebner avoided the tech bubble and cut his holdings of financial stocks right before the financial crisis. Capital Growth Management files quarterly 13Fs with the SEC to disclose many of its long equity positions (see Heebner's stock picks) - we track these filings as part of our process of developing investment strategies (for example, the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) but also to see what top managers like. We can also find their top picks in various categories, including those with low price-to-earnings multiples, so that investors can do research on any interesting names. Here are our brief thoughts on Heebner's five largest positions in stocks with both trailing and forward P/E multiples of 16 or lower:
Capital Growth Management increased its holdings of homebuilder D.R. Horton, Inc. (DHI) by 18% in the fourth quarter of 2012 to a total of 7.8 million shares. The stock has risen 50% in the last year on reports of a stronger housing market, bringing it to a forward earnings multiple of 16. A number of market players are bearish on the company, however, with the most recent data showing that 14% of the outstanding shares are held short. While we find it interesting that a homebuilder is trading at such a low multiple we are a bit wary of the industry and think that there may be better value plays elsewhere.
Heebner initiated a position of over 11 million shares in Delta Air Lines, Inc. (DAL), another stock which is up strongly in the last year (74% in this case) as the market warms a bit to its industry with the US Airways (LCC)-American Airlines merger having the potential to reduce airline competition. The stock trades at 13 times trailing earnings, and its bottom line is expected by the sell-side to improve over the next couple years. Airlines have certainly been a risky industry, but we think that Delta is at least worth considering even after the run-up in price.
The fund had owned shares of Herbalife Ltd. (HLF) at the end of September and may have taken advantage of the plunge in the stock price immediately following billionaire Bill Ackman's presentation on the company to buy more: it owned 3.3 million shares by the end of 2012. The stock is up strongly year to date, as Ackman's accusation of it as a pyramid scheme has been countered by activist Carl Icahn's move into the stock (find Icahn's favorite stocks) and bullish moves by several other hedge funds. Herbalife's trailing earnings multiple is 10; 34% of the outstanding shares are held short.
Capital Growth Management cut its stake in Ford Motor Company (F) but still owned 8.5 million shares of the automaker at the end of the fourth quarter. Many value investors have been long automakers and auto related stocks for some time, with some speculating in the case of Ford and peer GM that US consumers are on the cusp of needing to replace their aging cars. Ford's revenue was up 5% last quarter compared to the fourth quarter of 2011, and at a trailing earnings multiple of 9 it requires little growth in order to prove undervalued.
Foot Locker, Inc. (FL) was another Heebner favorite in Q4 as his fund built a small position up to almost 3.7 million shares. At a market capitalization of $5 billion, the stock carries trailing and forward P/Es of 13 and 11, respectively. In the fiscal quarter ending in early February 2013 (the fourth of Foot Locker's fiscal year), revenue was up 14% compared to the same period in the previous fiscal year and net income rose 28%. Even if those growth rates come down to single digits, that would still be attractive considering the stock's pricing and so we'd be interested in taking a closer look at the company.