Ric Dillon And Diamond Hill Capital's Top Stock Picks

Includes: C, HIG, JPM, MDT, UTX
by: Insider Monkey

By Matt Doiron

Many major investors are required to file 13Fs with the SEC within several weeks after the end of each quarter, and we track these filings in our database to help us research investing 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). Ric Dillon's Diamond Hill Capital has submitted its 13F for the first quarter of 2013 well ahead of the required time, disclosing many of its long equity positions as of the end of March. Read on for our quick take on the fund's five largest holdings by market value, see the full filing with the SEC, or compare its picks to those in previous filings.

Diamond Hill reported a position of over 11 million shares in Hartford Financial Services (NYSE:HIG), the $12 billion market cap property and casualty insurance company. Total revenues declined slightly compared to 2011, and with benefits rising in absolute terms Hartford experienced a fall in earnings. Wall Street analysts expect the company to recover, however, and as a result the stock's forward P/E is only 8. In addition, Hartford trades at a substantial discount to the book value of its equity with a P/B ratio of only 0.5. The recent performance is worrisome, but we think the stock is cheap enough to be worthy of value consideration.

Dillon and his team increased their holdings of Medtronic (NYSE:MDT) to 6.1 million shares, up from 5.3 million at the end of December. The large manufacturer of medical devices and appliances is right on the edge of value territory with a trailing earnings multiple of 14. The third quarter of Medtronic's fiscal year ended in January, during which a combination of low revenue growth and somewhat wider margins pushed net income up 6% versus a year earlier. As such, the stock actually looks about fairly priced -- not that attractive of a value candidate unless Medtronic's growth rates increase.

United Technologies (NYSE:UTX) was another of Diamond Hill's top picks with the filing disclosing ownership of about 3 million shares. The last quarterly report for United Technologies was a very strong one, as revenue grew 14% from its levels in the fourth quarter of 2011 and earnings were up at an even higher rate. Even if those growth rates cool, United Technologies could make for an interesting value prospect: the trailing and forward P/Es are 17 and 13, respectively. We would be interested in learning more about the company and if we can expect double-digit growth rates to continue for a few years.

The family of mutual funds sold a small portion of its Citigroup (NYSE:C) stake but the mega bank was still one of its largest holdings. Citigroup is notable for trading lower than the book value of its equity- the stock's P/B ratio is 0.7- as investors are not confident in the bank's assets. The sell-side expects it to improve its financials over the next couple years and so the forward P/E is 9. Citigroup does look like a good value, but at least in terms of earnings- even forward estimates- it is not particularly attractive compared to more reliable banks at this time.

JPMorgan Chase (NYSE:JPM) rounds out our list of Diamond Hill's top stock picks, with the 5.5 million shares in its portfolio at the beginning of April down very slightly from three months earlier. JPMorgan Chase's earnings were quite good in its most recent quarter compared to the same period in the previous year, though revenue only rose 1%. Both the trailing and forward earnings multiples here are 8, and the bank is slightly cheaper than book as well. As a result we think that JPMorgan Chase is at least a prospective value stock, and investors could certainly investigate it on those grounds.

Disclosure: I am long C.

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.