By Matt Doiron
We track quarterly 13F filings from hundreds of hedge funds and other notable investors, including Harvard's endowment Harvard Management. We've found in our research that 13Fs can be useful sources of information for investors. The most popular small-cap stocks among hedge funds tend to outperform the S&P 500 by an average of 18 percentage points per year (learn more about our small-cap strategy), and our own portfolio based on this strategy has earned an excess return of 33 percentage points in the last 11 months. We also like to see which stocks individual funds like and if any of these names might be good picks for investors. Read on for our brief thoughts on five of the largest positions in Harvard's 13F for the end of June (leaving aside companies which have since been acquired). See the full filing on the SEC's website, and check out the endowment's picks over time.
The largest single-stock position in Harvard Management's portfolio was its more than 13 million shares of Hudson City Bancorp (HCBK). The small-cap bank provides retail banking services in the New York City area. It is valued right about at the book value of its equity, though earnings have been down considerably compared to a year ago according to recent reports. In addition, the $4.8 billion valuation represents a high multiple on Hudson City's trailing earnings and so we might prefer to look at other regional banks.
The endowment's second largest holding, Stewart Enterprises (STEI), is a $1.1 billion market cap operator of funeral homes and cemeteries. Its stock price has risen 84% in the last year, fueled by higher net margins which drove the company's earnings up more than 30% in its most recent quarterly report compared to the same period in the previous fiscal year. This was despite essentially flat revenue. Over the long term we are unsure how longer these improvements in margins can continue, however, and the trailing P/E of 25 has already accounted for some future growth.
Harvard Management increased its stake in Colonial Properties Trust (CLP) to a total of 1.5 million shares as of the beginning of July. Colonial Properties is a real estate investment trust investing in commercial real estate. Because REITs receive favorable tax treatment condition on distributing a large share of taxable income to shareholders, they often pay high yields. Colonial Properties makes quarterly payments of 21 cents per share, making for an annual yield of 3.6%. However, it has a limited history as a publicly traded company and would of course carry macro risks.
Another REIT which the endowment liked was Pebblebrook Hotel Trust (PEB), whose properties include the Doubletree Bethesda. It has only been paying dividends since late 2010, and only recently increased the quarterly dividend to 16 cents per share, or a yield of 2.3%. In the first half of 2013, the company's funds from operations were $46 million (up from $32 million a year ago), and if we annualize that figure we get a P/FFO multiple of 18. The yield is likely not high enough to attract interest from income investors, so we would wait for more FFO growth here.
The filing disclosed ownership of 1.1 million shares of CommonWealth REIT (CWH), an office-focused real estate investment trust. The company significantly cut its dividend during the financial crisis, demonstrating that it (and likely the other REITs listed here as well) are vulnerable to macro shocks. At current prices and dividend levels the annual yield is 3.8%. The stock has spiked over 60% year to date as activists have been attempting to gain more power over CommonWealth's management and markets look to that as a potential source of creation of shareholder value.