Joe DiMenna's Top Stock Picks

by: Insider Monkey

Joe DiMenna is the Managing Director of Zweig DiMenna Partners. He co-founded the company, which is also one of the earliest alternative investment firms, with Martin Zweig in 1984. Business Week named DiMenna as "one of the best stock pickers no one has ever heard of" in 1999, as his fund returned an average of 25% after fees per year over the past 15 years at that time, beating the S&P 500 index by more than 6 percentage points. DiMenna also generated double-digit annualized returns between 2002 and 2007. However, DiMenna did not perform very well during recent years. The fund lost 6% in 2008, which was still much better than other hedge funds. But when other funds started to make up their losses in 2009, DiMenna was still down 3.5% in that year. DiMenna was also down about 3% in 2010. In this article, we are going to take a closer look at the most bullish bets of DiMenna at the end of 2011. Usually hedge fund managers top stock holdings perform better than the rest of their portfolio.

Anadarko Petroleum Corp (NYSE:APC): APC is the third-largest position in DiMenna's latest 13F portfolio. At the end of last year, DiMenna had $51 million invested in APC. The stock is very popular among hedge funds too. As of December 31, 2011, there were 51 hedge funds with Anadarko positions in their 13F portfolios. John Paulson was the most bullish hedge fund manager about Anadarko. Paulson & Co had over $700 million invested in this stock at the end of 2011. Jonathon Jacobson, Ken Fisher, and Ric Dillon were also bullish about APC.

Although Anadarko's total revenue was up about 27% to $14 billion over the past year, its net income was negative in 2011 due to its high operating expenses. The company suffered a net loss of over $2.5 billion, versus net income of $761 million for 2010. But the high expense seems to be non-recurring as it was mainly contributed by an unusual expense of over $6 billion in the past year, including impairment costs, Deepwater Horizon settlement and related costs, etc. In the next few years, Anadarko is expected to generate positive earnings. Analysts estimate it to make about $3.51 per share in 2012. Therefore, its forward P/E ratio is about 23, still higher than the industry average of 12.43. Anadarko's earnings are expected to grow at an average of about 25% in the next couple of years. Such high growth expectation is reflected in its current price and that's why it is trading at relatively high P/E ratio.

As contrarian investors, we do not recommend Anadarko. Investors will suffer losses if the company fails to meet the challenging growth expectations. We also do not like the aggressive financing strategies of the company and we think Anadarko is too risky to invest in. We think some other energy stocks, such as ConocoPhillips (NYSE:COP) and Exxon Mobil Corporation (NYSE:XOM), are much better choices than Anadarko. Though their growth rates are a bit lower - ConocoPhillips is expected to grow at 7% and Exxon at 6% - the price premium investors have to pay for Anadarko's growth is still excessive. In 2013, Anadarko is expected to make about $4.52 per share, so its P/E ratio for 2013 is about 18, doubling 8.8 for ConocoPhillips and 9.5 for Exxon.

Goldcorp Inc (NYSE:GG): Goldcorp is also one of the largest positions in DiMenna's portfolio. DiMenna significantly boosted his GG stakes by over 300% during the fourth quarter. As of December 31, 2011, DiMenna reported to own $48 million worth of Goldcorp shares. Some other hedge fund managers were also in favor of Goldcorp. There were 26 hedge funds with Goldcorp positions at the end of 2011. For instance, Jeffrey Vinik's Vinik Asset Management disclosed owning $34 million worth of Goldcorp shares at the end of last year. Jean-Marie Eveillard, Charles Clough, and Israel Englander were also among the fund managers with Goldcorp positions.

Goldcorp experienced strong growth over the past year. For the fourth quarter of 2011, the company reported total revenue of $1.52 billion, up 15% from $1.32 billion for the same quarter a year earlier. The average growth rate for gold miners was about 5.2% during that period. Its net income also improved by 22% from $332 million to $405 million. Goldcorp demonstrated positive earnings growth over the past two years. In 2011, it made $2.13 per share, versus $1.85 per share in the prior year. The company is expected to continue its strong earnings growth in the following years. In 2012, it is expected to make $2.55 per share. Therefore, its forward P/E ratio is about 18, versus 12.18 for the average of its peers. We think the main reason for the relatively high forward P/E ratio is because of its high expected growth. Analysts expect Goldcorp to grow at an average of over 18% per year in the next couple of years. However, we do not think the price premium for the high growth potential is worth paying. Goldcorp is estimated to have an EPS of $3.46 in 2013. So its P/E ratio for 2013 is 13.6, compared with 7.45 for its main competitor Barrick Gold Corp (NYSE:ABX).

A few other large positions in DiMenna's portfolio include Apple Inc (NASDAQ:AAPL), Motorola Mobility (NYSE:MMI), Pharmasset Inc (VRUS), Goodrich Corp (NYSE:GR), and Google Inc (NASDAQ:GOOG). DiMenna had at least $45 million invested in each of these positions. Pharmasset was acquired by Gilead Sciences Inc (NASDAQ:GILD) in January this year. It closed at $136.97 per share on January 17, up 5.13% since the beginning of this year. The S&P 500 index returned 1.44% in the same period. Motorola and Goodrich are also takeover candidates. Google announced to acquire Motorola for $40 per share, and United Technologies Corp (NYSE:UTX) offered to buy Goodrich for $127.50 per share. Currently, Goodrich and Motorola are both trading at a small discount to their merger prices. We like Apple and Google too. Both tech giants have attractive valuation levels. Google's forward P/E ratio is 17 and Apple's is less than 13. Both companies' earnings are expected to grow at about 20% per year.

Disclosure: I am long COP.