By Matt Doiron
Our research shows that the most popular small cap stocks among hedge funds- determined from quarterly 13F filings- earn an average excess return of 18 percentage points per year (learn more about our small cap strategy) and our own portfolio following this strategy outperformed the S&P 500 by 33 percentage points in the last 11 months. This shows that, contrary to many investors' belief, it is possible to use 13Fs to generate profitable investment returns. It's also possible to treat 13Fs as sources of free- albeit somewhat delayed- investment ideas, including stocks which a fund had just started buying in the last quarter. Read on for our quick take on the five largest new single-stock positions in billionaire Dan Loeb's Third Point's portfolio as of the end of June, check out the full 13F on the SEC's website, or see Loeb's previous filings.
Third Point initiated a position of about 850,000 shares in CF Industries (CF) in the second quarter of 2013. The $11 billion market cap fertilizer manufacturer experienced a slight decline in sales last quarter compared to a year ago, and profits were down 18% as a result. With CF Industries' stock price falling over 10% in the last year, the company is valued at 9 times forward earnings estimates and that is with Wall Street analysts expecting continued decreases in earnings per share next year. As a result the stock has value prospects if it can stop the decline in its business.
Elan (ELN), a biotechnology company which is on track to be acquired by Perrigo (PRGO), was another of Loeb's new picks. As part of the transaction, Perrigo - an American manufacturer of branded and generic drugs - will move its headquarters to Ireland (where Elan is based) for tax reasons. The offer is a mix of cash and stock which currently comes out to $15.40 compared to Elan's current stock price of $15.10. This is a return of about 2%; if the deal closes within the next six months that then makes for a zero-leverage annualized return of about 4%.
Loeb and his team bought 1.8 million shares of Disney (DIS) between April and June. The film entertainment business held the company back in its most recent quarter, and so financials were up only modestly compared to the same period in the previous fiscal year despite good results in TV and theme parks. Disney trades at 19 times trailing earnings as media and entertainment stocks generally trade in the high teens and as markets look at the Lucasfilm - as well as continued contributions from the Marvel brand- to drive growth over the next several years.
The fund reported a position of 1.3 million shares in Marathon Petroleum (MPC), the downstream oil and gas company recently spun out from Marathon Oil. Refining and marketing stocks are generally trading at low multiples in the current market environment, and Marathon is no exception with a forward P/E of only 8. However, contracting margins have been forcing the company's earnings down. While the sell-side believes this to be temporary, and is actually projecting improvements on the bottom line for the next several years, we would want to check it out further before considering it as a value play.
According to the 13F, Third Point was also buying Williams Companies (WMB), an owner of pipelines and related energy infrastructure. The company has paid quarterly dividends of at least 30 cents per share for the last five quarters, which at current prices results in a yield of close to 4%. Recent earnings, however, have been fairly low- the trailing and forward P/Es are 38 and 29, respectively- and so income investors should hesitate before treating Williams as a long-term source of generous dividends.