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American stock investor, investment advisor and financial analyst Martin Zweig can be called one of the original "gurus" of investing, back when the term "guru" wasn't applied to investing experts like it is today. Born in 1942, Zweig's basic investing methodology is based on selecting growth stocks that also have certain value characteristics, determined through a system that uses both fundamental analysis and market timing. Although he has many media appearances and newsletters to his credit, he is arguably made most famous by his 1986 book, “Winning on Wall Street,” which laid out his methodology of market timing and stock selection. Besides his investing prowess, he is also known for his lavish lifestyle. For example, in 2005, his New York City apartment was listed at $70 million as the most expensive residence in the United States.

Martin Zweig quit the game in 2005, but his investing legend lives on in his Hedge Fund Zweig-DiMenna Associates, that he co-founded in 1984 with Joseph A. DiMenna, Jr. The firm has assets under management of $3.5 billion, with $1.9 billion invested in U.S. equities as of the latest 13-F filing by the firm for the period ended March 2011. Zweig-DiMenna is considered one of the earliest Hedge Funds, and its co-founder Joseph DiMenna is considered as a pioneer in long/short investing. The hedge fund has returned 18.3% compound annual return or total return of 9,057% since inception in 1984.

The fund holds a diversified portfolio of 267 positions, with 50% of its holdings in large-caps, 40% in mid-caps, and the remaining 10% in small-cap equities. Its portfolio turnover is 150%-200% implying an average holding period of six to eight months. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that the portfolio is over-weight basic materials (15%) and financials (19%) sectors, and it is under-weight consumer non-cyclical (2%), energy (17%) and healthcare (7%) sectors, compared to the weighting of these sectors in the overall economy.

The following summarizes its largest new buys and sells in the latest reported 13-F filing for the March 2011 quarter, and updated based on any 13-G filings since the end of the quarter:

  • Technology sector: Buy Apple Inc. (NASDAQ:AAPL). Zweig cut $40 million from its $295 million prior quarter position in the sector. It cut $32 million of its $56 million position in Apple Inc., a position opened in the $50s in early 2005, so the selling of a portion of that in the $350s last quarter is profit-taking. AAPL is trading at a forward price-to-earnings (P/E) ratio of 11-12, at the bottom of its historic P/E range. The company continues to beat analyst estimates every quarter by a wide margin, in the range of 15%-20%. Of the 47 analysts covering the company, 52 rate it a buy/strong buy and only one rates it a sell, and recent analyst activity have put price targets for AAPL stock in the $450s-$500+, still a significant premium to current prices in the $320s. The stock has been up more than 20-fold in the last seven years, including more than four-fold since the lows in early 2009. Like many growth story stocks, it typically pulls back 15%-20% in a technical correction before mounting the next leg up. We believe right now would be a good time to start accumulating AAPL, and would buy small amounts at current levels and adding on the way down if it corrected, unless the fundamentals turn negative on the stock. With projected earnings of almost $30 in fiscal year 2012, and $51 billion in net cash or over $55, we believe there is adequate downside protection on the stock based on the current fundamentals.
  • Services sector: Sell Priceline.com Inc. (NASDAQ:PCLN) and Buy Wyndham Corp. (NYSE:WYN) on a Dip. Zweig cut $40 million from its $260 million prior quarter position in the sector. It dropped its $31 million position in the name-your-own price online travel services provider Priceline.com Inc. and added a new $25 million position in vacation ownership property management and resort company Wyndham Worldwide Corp. WYN stock has recovered to pre-recession levels in the $30s as the company revenue and earnings are expected to rise above 2007 levels. Analysts are optimistic, with nine of the eleven analysts rating it as a buy and the remaining two a hold, with targets in the $40s-$50, significantly above current low-$30s level. However, the economic recovery continues to be sluggish and with the stock having gone up almost 17-fold from the $2s in 2008/09 crisis, we would wait for a correction in the mid-$20s to start accumulating the stock. The position in PCLN was opened in the mid-$300s at the end of 2010, so the selling in the $500s last quarter was profit-taking. PCLN trades at a forward 19-20 P/E, near the top of its historic P/E range. Earnings growth continues and the stock continues to beat analyst estimates every quarter, but both the growth rate and the margin by which they beat analyst numbers has been shrinking in recent quarters. The stock has gone up over 12-fold since the lows in 2008 and is now trading near its year 2000 highs. We believe the upside is limited from current levels, whereas there is significant execution risk to the downside and would sell PCLN at these levels.
  • Consumer cyclical sector: Buy Navistar International Corp. (NYSE:NAV). Zweig maintained unchanged its $100 million position in the sector. It dropped its $25 million position in Navistar International Corp., a manufacturer of medium and heavy trucks for the government, construction, energy and commercial transportation markets. The position in NAV was opened in the mid-$50s at the end of 2010, so the dropping of that position the last quarter in the high-$60s was profit-taking. NAV trades at a forward 7 P/E, at the bottom of its historical P/E range. Revenue is expected to grow in the mid-teens while earnings are projected to take off, rising from $3.17 in 2010 to $5.50 in 2011 to $7.35 in fiscal year ending October of 2012. Analysts are also bullish on the company, with twelve of the 18 analysts rating it as a buy/strong buy and only two at underperform, with recent targets on analyst actions in the mid-$70s to mid-$80s. The stock has recently corrected 30% into the low-$50s, and we rate it as an attractive buy here.

Table

Company

Ticker

Action

Market Value at end of March 2011 Quarter

Change in Value from Prior Quarter

Percent of Portfolio

Percent Shares Owned

New 13G 5% Ownership Filing Since End of March 2011 Quarter

None

Top Buys and Sells

Barrick Gold Corp.

ABX

Drop

$ 0 million

($42) million

0.00%

0.00%

Marathon Oil Corp.

MRO

New

$ 39 million

$39 million

1.97%

0.10%

Chesapeake Energy Corp.

CHK

New

$ 32 million

$32 million

1.63%

0.14%

Apple Inc.

AAPL

Cut

$ 24 million

($32) million

1.25%

0.01%

Prudential Finl Inc.

PRU

Cut

$ 18 million

($32) million

0.95%

0.06%

Priceline.com Inc.

PCLN

Drop

$ 0 million

($31) million

0.00%

0.00%

Potash Corp Saskatchewan

POT

New

$ 26 million

$26 million

1.34%

0.05%

Newmont Mining Corp.

NEM

Cut

$ 5 million

($26) million

0.28%

0.02%

Navistar Intl Corp.

NAV

Drop

$ 0 million

($25) million

0.00%

0.00%

Royal Dutch Shell Plc

RDS

New

$ 25 million

$25 million

1.27%

0.02%

Wyndham Worldwide Corp.

WYN

New

$ 25 million

$25 million

1.27%

0.46%

Top Holdings

Goldcorp Inc.

GG

Add

$ 47 million

$4 million

2.41%

0.12%

Google Inc.

GOOG

Add

$ 37 million

$0 million

1.89%

0.02%

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our "opinions" and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Source: 3 Buys and a Sell From Zweig-DiMenna Partners