By Matt Doiron
The most comprehensive picture of hedge funds' portfolios comes in the form of quarterly 13F filings, and so this is the primary source of data for our research on investment strategies- we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). Last August we launched a newsletter disclosing these small cap picks; since that time, this portfolio has outperformed the S&P 500 by 33 percentage points and the Russell 2000 by 25 percentage points.
For more up to date information on specific stocks where specific funds are buying up a large position- over 5% of the company, in most cases- we can use 13D and 13G filings. Investors can't blindly follow every single one of these picks, but we think that they can work similarly to a stock screen in helping identify initial investment ideas for further research. Read on for our thoughts on five stocks which hedge funds have bought recently.
Billionaire Stephen Mandel's Lone Pine Capital, one of the best known of the "Tiger Cub" hedge funds, has been busy with three recent filings. The fund now owns close to 18 million shares of Dollar General (DG), the $18 billion market cap dollar store. Given the nature of the business, it's not too surprising that Dollar General expresses little dependence on the overall economy with a beta of only 0.1. While earnings growth has been limited recently as the company's margins have shrunk, the stock trades at 19 times trailing earnings and so Mandel apparently believes that profits will accelerate.
Another retailer which Mandel's team has been buying is footwear store DSW (DSW), now with 5.6% of that company under its ownership. Check out more stocks Mandel has been buying. As with Dollar General, DSW is fairly aggressively priced: the trailing and forward P/Es come out to 28 and 20 respectively. While sales grew 9% in the first half of its current fiscal year compared to the prior year period, this has been entirely offset by higher costs and so there has actually been a slight decline in operating and net income. As a result we would avoid the stock at these levels.
The fund also owns about 5% of B/E Aerospace (BEAV), a $7.1 billion market cap provider of aircraft seats and other interior components. While the trailing P/E is fairly high at 26, B/E Aerospace recorded double-digit growth rates on both top and bottom lines last quarter compared to the second quarter of 2012. Wall Street analysts are expecting continued growth resulting in a forward earnings multiple of only 16 and a five-year PEG ratio of 0.9. We wouldn't put too much faith in those projections, but would be interested in watching for further results from the company.
Third Point, managed by billionaire Dan Loeb, has increased the size of its position in Sotheby's (BID) to a total of 3.9 million shares giving the fund 5.7% of the total shares outstanding. Find Loeb's favorite stocks. With demand from big spenders being tied to a prospering upper class (and therefore a strong economy), the auctioneer features of beta of 2.8. Loeb is a well known activist investor and as this position was disclosed in a 13D rather than a 13G he may have plans to improve the company's operations. Markets seem to have priced in quite a bit of improvement already given the trailing P/E of 31.
Finally, billionaire Ken Griffin's Citadel Investment Group has taken a significant position in Accuray (ARAY), a $500 million market cap medical device company (on average nearly 1 million shares are traded per day). Accuray recently reported a smaller than expected quarterly loss, sending the stock up strongly on the day. We'd note that the most recent data shows 31% of the float held short and so Griffin and his team may have been counting on a short squeeze following the company's results. The most recent analyst consensus showed very low earnings per share expected for 2014.