One of the best ways that investors can try to decide which stocks will make for a good investment is to look at what the pros are doing. This can be done by examining a few official filings such as 13F, 13D, and 13G reports. 13F filings are done quarterly and show which positions hedge funds have taken. 13D and 13G reports are done more often but only when a fund has taken a position of at least 5%. Having said that let's take a look at three stocks, which appear to be in the midst of hedge fund accumulation. The three stocks were chosen based on the following criteria:
- Business which focuses on retail
- Market Capitalization Of At Least $1 Billion
- Average Trading Volume Of At Least 3 Million Shares
- Hedge Fund Holds At Least 5% Of Company Shares
Herbalife Ltd. (HLF)
Herbalife Ltd. is a global network marketing company that sells weight management, nutritional supplements, energy, sports and fitness products and personal care products through a network of independent distributors.
Earlier this year, one of the top hedge funds in the world, Third Point, took an 8.2% stake in Herbalife. In addition, one of the world's leading investors, Carl Icahn, disclosed that he held a 12.98% stake in Herbalife, which amounts to roughly 14 million shares.
However, despite these large hedge fund holdings, the stock has continued to disappoint as it continues to fall lower and lower, as the chart below shows.
Since late January, when hedge fund disclosures in Herbalife came out, the stock has decreased by roughly 10%. The primary reason for the downtrend is the concern that Herbalife may be a ponzi scheume, according to hedge fund manager Bill Ackman.
The fundamentals appear to be lining up for Herbalife. If we look at the company's balance sheet, we will see a trend of rising cash and rising current assets. At the end of 2011, Herbalife had $258.8 million in cash, and $768.8 million in current assets. At the end of 2012, those numbers had increased to $333.5 million and $963.8 million, respectively. On the downside, the company's long-term debt had also increased to $431 million, an increase of roughly $230 million from 2011. On the income statement, Herbalife also generated some impressive numbers. Total revenue came in at $4.08 billion, up from $3.45 billion in 2011. This translated to a net income of $477.2 million, an increase of approximately $64.5 million from 2011.
J.C. Penney Company (JCP)
J.C. Penney Company is a retailer, operating roughly 1,100 department stores. Its business consists of selling merchandise and services to consumers through its department stores and through its internet website.
One of the largest hedge funds in the world, Soros Fund Management LLC, has disclosed a 7.91% stake in the retailer. This translates to a holding of roughly 17.4 million shares. This is an extremely interesting disclosure as the retailer has had one of the worst years of any company.
As the chart shows, J.C. Penney has declined by roughly 53% over the past year. It would be more except for today's rally on news that George Soros is now involved. Let's take a look at the fundamentals to get an idea of some of the problems the company faces.
Let's first take a look at the company's most recent reports for the period ending February 1, 2013. The balance sheet will help explain why the company had a rough year. At the end of this period, J.C. Penney's cash stood at $121 million, down $54 million from the prior year. Additionally, the firm's long-term debt had gone up by $85 million, to a total of $2.96 billion. Whenever cash goes down and debt goes up, that's quite bad. If we switch gears and take a look at the income statement, we will see the other half of the picture. For last year, J.C. Penney generated total revenue of $12.99 billion, down roughly $4.3 billion from the prior year. Additionally, the retailer generated a horrific net loss of $985 million. The prior year only saw a net loss of $152 million. Two years ago, the company actually generated a profit of $389 million. Clearly things have deteriorated but apparently George Soros thinks things may turn around.
Supervalu Inc. (SVU)
Supervalu Inc. is a U.S. grocery channel that operates in two segments: retail food and independent business. The company leverages its distribution operations by providing wholesale distribution and logistics solutions to its independent retail customers.
Like with the two companies above, one of the world's largest hedge funds, SAC Capital, has disclosed a stake of 5.1% in Supervalu, on April 1, 2013. This translates to roughly 10.8 million shares. Prior to this disclosure, SAC Capital only held 25,100 shares. Since the disclosure, the company has been on a tear. Even more impressive is the performance over the past 26 weeks, as shown in the chart below.
Over the past 26 weeks, Supervalu has increased by approximately 100%. The stock has been on an absolute tear. Since SAC Capital disclosed its stake in the company, Supervalu has increased by 23.5%. Let's take a look at Supervalu's fundamentals, especially since it released its new report this morning.
The earnings report was for the fourth quarter for fiscal 2013 ended February 23, 2013. Unfortunately for the company, it was an extremely disappointing report. The company posted a loss of 14 cents per share. The projection was actually for a gain of 14 cents. The loss occurred because of disappointing same-store sales and reduced discretionary spending by consumers in the U.S. Additionally, the company's sales decreased by roughly 2.3% to $3.9 billion. Zacks estimated that the company would generate $7.9 billion. Overall, this was very disappointing and it's actually surprising that the company actually closed up in trading today.
Investors can use hedge fund holding information as an extra tool in their investing methodology. Keep in mind though, it is still extremely important to analyze both the technical and fundamental aspects to ensure that a particular company is both a sound investment and that it is the right time to invest.