$6 Billion Hedge Fund Carlson Capital's Top Stock Picks

Includes: GG, HSH, KHC, PNC, RIG
by: Insider Monkey

By Matt Doiron

Clint Carlson founded Carlson Capital in 1993, and the fund now has over $6 billion in assets under management. The fund recently filed its 13F, disclosing many of its long equity positions as of the end of December 2012. Even though 13F filings are several weeks old, we think there are multiple ways in which the information in them can be used to inform investment decisions. We have analyzed 13Fs over time, and have found that the most popular small cap stocks among hedge funds tend to produce an excess return of 18 percentage points per year. Investors can also review what stocks a hedge fund or other notable investor likes, and then investigate any companies that seem appealing. Read on for our quick take on five of Carlson's largest holdings and compare them to previous filings.

The fund's largest position by market value was its 2.7 million shares of Transocean LTD (NYSE:RIG). Carlson had owned 2.2 million shares at the end of September, so this represents a significant increase in its stake. The offshore driller trades at 12 times consensus earnings for 2013, with Wall Street analysts expecting enough growth over the next several years to make Transocean a buy: the five-year PEG ratio is 0.7. We would be wary of trusting the sell-side, but deepwater drilling does have strong prospects if oil prices rise. Billionaire Leon Cooperman's Omega Advisors had reported owning a little over 3 million shares of Transocean at the end of the third quarter of 2012 (find Cooperman's favorite stocks).

Carlson owned 3.7 million shares of Hillshire Brands Co (NYSE:HSH), down slightly from three months earlier, but still one of the fund's top stocks. The processed and packaged food company, known for its meat and bakery brands, carries a forward P/E of 18 based on expectations for the fiscal year ending in June 2014. Sales have been up only slightly, and so we think that we would avoid the stock until the impact of last year's spin-out is more clear.

PNC Financial Services (NYSE:PNC) was another of Carlson's favorite stocks at the beginning of 2013. At a market capitalization of $34 billion, the bank trades almost exactly at the book value of its equity. Last quarter, it experienced double-digit growth rates on both top and bottom lines; net income was up over 50%. Considering that PNC is cheap, at least on an absolute basis, when we look at its valuation relative to its earnings, these growth rates are particularly intriguing. We could see comparing it to larger banks, which are slightly cheaper, including Citigroup (NYSE:C) and JPMorgan Chase (NYSE:JPM).

Diversified food company Kraft Foods Group Inc (KRFT) had not been one of the top picks in Carlson's portfolio at the beginning of October, but the fund entered 2013 with nearly 2 million shares in its portfolio. The current-year P/E multiple here is 18, and as with Hillshire, Kraft may still be working through the effects of its earlier breakup. It may be of interest to defensive investors given its low beta, but from a value perspective, it might better be placed on a watch list.

The fund bought shares of Goldcorp Inc. (NYSE:GG), and closed December with 2.3 million shares in its portfolio. The gold miner's stock price is down 22% in the last year, although the recent performance of the business has been strong; results from the third quarter of 2012 showed 18% revenue growth versus a year earlier, with earnings rising 48%. Goldcorp carries trailing and 2013 P/Es of 19 and 16, respectively. Of course, the company would be dependent on gold prices, and investors would have to be comfortable with the inherent commodity risk. Of course, the flip side is that investors interested in gold could consider it or other miners as a substitute for buying gold directly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.