By Matt Doiron
While many market watchers claim that tracking hedge funds' quarterly 13F filings is unproductive, we have actually done research on 13Fs and have found that it is possible to develop and implement profitable investment strategies based on the included information. The most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year on average, and our own portfolio following this strategy earned an excess return of 33 percentage points in the last 11 months (learn more about our small cap strategy). We can also examine filings from individual managers to see if they have come up with any interesting investment ideas and recommendations. Read on for our quick take on the five largest positions in billionaire Kerr Neilson's Platinum Asset Management's 13F portfolio as of the end of June, see the full filing on the SEC's website, or find the fund's top picks over time.
Platinum reported a position of more than 13 million shares in Microsoft (MSFT) in the filing. At current prices and dividend levels, Microsoft pays a dividend yield of close to 3%. The stock trades at 12 times its trailing earnings, which might normally qualify a stock for value status, though in the case of Microsoft we would be somewhat concerned that its recent results have been temporarily higher due to the release of Windows 8. We would also note, however, that cash and cash equivalents do account for a significant portion of Microsoft's market capitalization.
Bank of America (BAC) was another of Neilson's top picks and the only financial among his five largest 13F holdings. While Bank of America's earnings have been low on a trailing basis, profits have been picking up in recent quarters as the company has cut costs. Wall Street analyst forecasts imply a forward P/E of only 10, though it should be noted that this is actually a small premium to some other large banks. Bank of America does trade at a discount to its peers in terms of its valuation relative to the book value of its equity, with a P/B ratio of 0.7.
The fund had about 370,000 shares of Google (GOOG) in its portfolio at the beginning of July. Between the integration of Motorola Mobility Holdings and the performance of the star search advertising business, Google has been delivering double-digit growth rates on both top and bottom lines compared to a year ago. Quite a bit of future growth is already priced in, though analysts are bullish enough on next year that the forward earnings multiple is 17. At that pricing, investors who are convinced that these growth rates will continue for some time should be interested in researching Google further.
Neilson and his team maintained a position of about 5 million shares in Sina (SINA), the $5.5 billion market cap Chinese Internet portal. The company's adjusted earnings have been very low on a trailing basis compared to the stock's valuation, and even with the sell-side expecting EPS to more than double next year compared to 2013 the stock is still priced at over 40 times forward estimates. Revenue grew 20% in the second quarter of 2013 versus a year earlier- not exactly a high rate considering the valuation, and of course there would be concerns about Chinese macro as well.
The 13F shows that Platinum slightly increased its holdings of Cisco (CSCO) to a little over 11 million shares by the end of the quarter. Cisco's fiscal year ended in July, with the company's sales up 6% in its fiscal Q4 compared to the prior year period along with a decent increase in net margins. However, weak guidance from management caused the stock to drop. Now, with a trailing P/E of 13, there seems to be little if any growth priced in and dividend payments are high enough for a yield of almost 3%. As a result we'd be interested in taking a closer look at the company.