By Matt Doiron
Several weeks after the end of each quarter, hedge funds and many other major investors are required to file 13Fs with the SEC. These filings disclose many of their long equity positions as of the end of the quarter; we use this information to help us develop investing strategies (for example, we have found that the most popular small-cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and to track individual managers over time. One of the hedge funds that we track is billionaire James Dinan's York Capital Management. Here are the five largest holdings by market value in York's portfolio at the beginning of this year which the fund had also owned at the end of 2010 (or see the full list of stocks from the most recent 13F):
Dinan and his team reported a position of almost 12 million shares in Hertz (HTZ), which rents cars to a consumer audience as well as equipment. Because equipment rental is so connected to the overall economy, Hertz carries a beta of 2.8. Business has been doing well recently - in the first quarter of 2013, revenue surged 24% versus a year earlier - and while the trailing P/E is high Wall Street analysts at least are bullish with consensus forecasts for 2014 implying a forward earnings multiple of only 10. As such Hertz could be a growth stock, and we'd be interested in learning more about the company.
York recently increased its holdings of Citigroup (C) to a total of 2.7 million shares. A number of other hedge funds liked Citi during the fourth quarter of 2012, and as a result it made our list of the most popular stocks among hedge funds (find more of hedge funds' favorite stocks). Revenue and earnings have been picking up at Citigroup, and even after a significant rally over the last year it still trades at a discount to the book value of its equity with a P/B ratio of 0.8. It doesn't look quite as good from an earnings point of view, however, and so other large banks might be better value investments.
Manitowoc Company (MTW) has been another of Dinan's long-term stock picks with the most recent filing disclosing ownership of 5.7 million shares. Manitowoc is a $2.5 billion market cap manufacturer of construction equipment (mainly cranes) as well as food service equipment. As with Hertz, its beta is high - 3.9 in this case - since the construction equipment focus makes it dependent on macro. The sell-side is also expecting high earnings growth here: the trailing and forward P/Es are 22 and 11, respectively, with a five-year PEG ratio of 0.4. As such caution is warranted.
The fund owned 2.7 million shares of Chemtura (CHMT), a manufacturer of specialty chemicals, at the end of December. Chemtura's beta is 2.5, reflecting sensitivity to movements in broader market indices, and while earnings have been low on a trailing basis the stock trades at 11 times forward earnings estimates. (Sound familiar?) We would note that Chemtura's revenue was down 14% in its most recent quarter compared to the same period in the previous fiscal year, and so we'd be considerably more hesitant to think of it as a growth stock than some of the other companies we've covered here (or peers in chemicals).
According to the 13F, Dinan had 1.5 million shares of Radware (RDWR) in his portfolio. The networking services company has also been struggling recently, with net income down 35% last quarter compared to the first quarter of 2012. At a market capitalization of about $680 million (on average about 450,000 shares are traded per day, and we'd say there is plenty of dollar volume for most investors) Radware trades at 24 times its trailing earnings. With the business's numbers looking as challenging as they are, we would avoid the stock.
Chemtura joins Radware in our minds as stocks which probably aren't worth further research. Citigroup is certainly cheap from some perspectives, and we wouldn't rule it out as a value play, but we think that investors should at least consider other large banks including JPMorgan Chase or Wells Fargo. The equipment companies are certainly very high beta stocks, so should only be considered if an investor's portfolio can handle more market risk, but in those cases the growth opportunities at Hertz and Manitowoc could make the stocks attractive at these levels.