By: Andrei Braghiş
Locust Wood Capital Advisers is a New York-based hedge fund that made significant changes to its top holdings last quarter. According to its first quarter 13F with the SEC, the fund bet big on the duo of a media conglomerate and a REIT. It's important to pay attention to what hedge funds are doing, so let us do just that: we'll analyze the top five stock picks of Locust Wood to determine how it has prepared for Q2 and beyond.
Why should we pay attention?
Empirical studies have shown that it can benefit everyday investors by watching hedge fund sentiment. It has been discovered that "piggy backers" who track a specific hedge fund activity can outpace the broader indices by an average of 18 percentage points annually (learn the secrets of this strategy here).
Newcastle Investment (NYSE:NCT) tops the list of Locust Wood's major holdings. The REIT's shares are currently traded at a trailing Price to Earnings (P/E) ratio of 5.45, which is considerably lower than the industry average of 27.70, as reported by Yahoo! Finance. Newcastle Investment pays a dividend of $0.88 for a yield of 7.5% and has a good reputation among analysts. Four of those who cover the REIT recommend it as a Buy, and one considers it to be a Strong Buy. Clearly, experts expect the price of the stock to appreciate, setting a price range of $11-$14, with a current price of approximately $12. Earnings and revenues of Newcastle Investment are expected to fall this year, but to rise again in 2014.
The stock has a beta of 1.97, which makes it a moderately risky play, but considering the stable recovery of the U.S. housing market, one might see Newcastle a solid, long-run investment. A low interest-rate environment for the considerable future is also a positive for REIT investors.
The best of the rest
The management of Locust Wood has made a 12% increase in their share of Liberty Interactive (LINTA), taking the total holding to more than 1.1 million shares. The stock price of the video and online commerce company has been on a proverbial roller coaster ride in 2013, creating several highs and lows, followed by big correction moves. So far this year, Liberty Interactive shares have advanced 5.4%, and on May 6th, registered a closing price of $21.69. Shares are trading at a trailing P/E ratio of 7.81, well below the industry average of 59.40 and have a beta of 1.53. Opinion regarding the performance of this stock is evenly distributed among the nine analysts who have initiated coverage, each third tagging it as a Hold, Buy or Strong Buy.
Locust Wood has taken their share of Morgan Stanley (NYSE:MS) stock from zero to more than 700,000 shares in the first quarter of 2013. The New York, NY based financial broker has seen its share price lie in an uptrend since the start of 2013, advancing 15.5%. The stock has a trailing P/E ratio of 43.76 and a forward P/E ratio of 9.20, and therefore, market participants expect the company to grow and post higher earnings in the process. Sixteen analysts recommend the stock as a Hold and 10 recommend it as a Buy or Strong Buy. Revenues are expected to increase by 19% in 2013, while Earnings Per Share (EPS) are expected to increase as well, to $2.06 a pop. With a beta of 2.25 and a dividend of $0.20, which represents a yield just shy of 1%, we believe one should treat this stock carefully.
Another stock that has gained a larger footing in the Locust Wood equity portfolio is General Motors (NYSE:GM). Locust's management has added more than 500,000 shares, a 722% increase from the previous quarter. GM shares are traded at a trailing P/E ratio of 10.92 and a forward P/E ratio of 7.35. It is considered a rather risky investment, because it has a beta of 1.70 and pays no dividend. GM has been growing steadily in the past five years and is expected to grow even further. Analysts expect the automaker's revenues to grow 2.7% in 2013 and 6.2% in 2014. Earnings are also expected to grow, as Wall Street is expecting EPS of $3.35 and $4.33 in 2013 and 2014 respectively.
The final fifth
The fifth largest position in the Locust Wood equity portfolio is Kinder Morgan (NYSE:KMI), a firm that manages oil and gas transportation and storage assets. The energy company's stock price has increased by 9% so far this year, reaching a high of $40.09 on April 24. Currently priced at approximately $39 a share, the stock is trading at a trailing P/E ratio of 66. With a forward P/E ratio of 26.05, the company is expected to register higher revenues and sales in the coming months. Kinder Morgan pays a dividend of $1.46-a yield of a little under 4%-and has a beta of 0.79, making it a conservative investment. Seven analysts recommend the stock as a Buy, while five consider it to be a Hold. The price range of the stock is estimated at $34-$48; shares are currently priced at an 18% discount from the upper bound of this range.
Locust Wood Capital has built a balanced equity portfolio by investing in companies that provide a constant stream of cash while maintaining solid financial performance, though long-term growth is an important piece of the puzzle as well. Kinder Morgan and Newcastle Investment look like a couple of the most intriguing plays out of this group, and go here for more information on what 13F filings can reveal.
Disclosure: I am long MS.
Business relationship disclosure: This article is written by Insider Monkey's writer, Andrei Braghis, and edited by Jake Mann. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.