By Matt Doiron
Several weeks after the end of a quarter, hedge funds and other major investors file 13Fs with the SEC to disclose many of their long equity positions as of the end of the quarter. We track these filings and use them for a variety of purposes, including developing investment strategies. On average, the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy) and our own portfolio tracking the most popular small caps has outperformed the S&P 500 by 33 percentage points in the last 11 months.
It's also potentially valuable to review filings from individual managers to see if any of their stock picks are good values that investors should be considering. Read on for our thoughts on the five largest positions that Edgar Wachenheim's Greenhaven Associates reported owning as of the end of June, see the full filing on the SEC's website, or compare these picks to those in previous filings.
The fund reported a position of about 12 million shares in home improvement store Lowe's (LOW). Home improvement stores, including Lowe's and its peer Home Depot (HD), have been popular ways to play a rising housing market and the stock is up over 70% since a year ago. However, Lowe's has not shown much of an improvement in its business with both revenue and profits about flat in its most recent quarterly report compared to the same period in the previous fiscal year. Wall Street analysts do expect growth to pick up, and the forward earnings multiple of 18 represents a small discount to its larger peer though Home Depot's own growth rates have been notably higher.
Wachenheim and his team owned 4.6 million shares of FedEx (FDX) at the beginning of July. FedEx's most recent fiscal year ended in May, with the company's 10-K recording shrinking margins- including higher transportation costs- and therefore a decrease in earnings compared to the previous FY despite a 4% rise in revenue. As with Lowe's the sell-side expects FedEx to improve in 2014, placing the current stock price at 13 times forward earnings estimates. If the company could hit that target it would be close to value territory, though investors should be careful not to take analyst projections at face value.
Greenhaven slightly increased its stake in Baker Hughes (BHI), the provider of drill bits and other oilfield equipment and services, to a total of 8.1 million shares. Similarly to FedEx, higher costs have recently caused Baker Hughes to see a decline in net income from its levels a year ago. Another similarity is that analysts are optimistic about the prospects for a recovery in the company's financials and so the forward P/E is fairly low at only 12. Again, we'd be cautious but we are interested in oilfield services particularly as activity in the U.S. continues to be strong and would be interested in comparing Baker Hughes to its peers.
FedEx's peer UPS (UPS) was another of Wachenheim's top picks as the filing disclosed ownership of over 4 million shares of the other large shipping and logistics company. In the second quarter of 2013, UPS's sales were up only slightly versus a year earlier and with net margins contracting a bit the company's profits decreased by 4%. The forward earnings multiple is 16, something of a premium to where FedEx trades on the same basis, and it should be noted that the stock pays a dividend yield of just under 3%. Still, we would avoid it at least until the company shows that it will be able to grow earnings in current economic conditions.
Recent Bill Ackman activist target Air Products & Chemicals (APD) rounds out our list of Greenhaven's largest holdings. Ackman and his team at Pershing Square- who now own about 10% of the company- have been successful in improving operations at their activist holdings in the past, including a big win in Canadian Pacific (CP). The $23 billion market cap company, which manufactures gases and other industrial materials, features trailing and forward P/Es of 23 and 18 respectively. Revenue growth has been close to 10%, but costs have been rising even faster at least prior to any major changes being forced by Ackman.