We have been going through hedge fund 13F filings from the fourth quarter of the year. One use of this information is by applying investing strategies which have worked in the past; for example, the most popular small cap stocks among hedge funds have produced an average excess return of 18 percentage points per year (learn more about our small cap strategy) and other techniques are likely possible as well. 13Fs can also be used to see what specific investors are doing in the markets. D.E. Shaw is a large hedge fund (total assets under management are over $25 billion) founded in 1988 and named after founder David Shaw. Shaw has since become a billionaire due to the combination of his fund’s size and success. Here are D.E. Shaw’s five largest holdings by market value at the end of 2012 according to its 13F filing (or check out more of Shaw’s stock picks):
The fund actually added slightly to its position in Apple Inc. (NASDAQ:AAPL), closing December with a total of 1.5 million shares in its portfolio. Apple Inc. (NASDAQ:AAPL) is no longer the most popular stock among hedge funds, according to our database; that status now belongs to American International Group Inc (NYSE:AIG). See more of the most popular stocks. Down 17% in the last year, Apple Inc. (NASDAQ:AAPL) now trades at 10 times trailing earnings as the market consensus becomes that earnings will fall due to lower margins. Wall Street analysts remain highly bullish, with their growth projections implying a five-year PEG ratio of 0.5, and calls are intensifying for management to better use its cash.
Read on for more of D.E. Shaw’s top picks:
International Business Machines Corp. (NYSE:IBM) was another of D.E. Shaw’s top stock picks. The IT services and software company experienced a slight decline in revenue in its most recent quarter compared to the fourth quarter of 2011, but net income increased 6%. At trailing and forward P/E multiples of 14 and 11, respectively, there is some value case as long as IBM can continue growing its earnings. The stock is one of Buffett’s top picks, and billionaire Ken Fisher’s Fisher Asset Management owned 3.3 million shares according to its own 13F (research more stocks Fisher owned).
The fund’s ownership of AIG- which we previously mentioned as the new most popular stock among hedge funds- ticked up a bit to almost 12 million shares. We think that AIG has substantial upside from its current discount to the book value of its equity, even though it certainly should not be trading at book from our perspective until it has demonstrated that it is not as risky as it turned out to be during the financial crisis. Third Point, managed by billionaire Dan Loeb, was selling shares of AIG last quarter but still owned over 18 million shares (see other stocks that Loeb likes).
IBM wasn’t the only Buffett favorite that D.E. Shaw liked on its own dime: the 13F disclosed a position of 9.8 million shares in Wells Fargo & Company (NYSE:WFC), though this was down from three months earlier. Wells Fargo trades at a premium to book, though the company has been quite successful in monetizing its assets: in the fourth quarter earnings were up 24% versus a year earlier on decent revenue numbers and improved margins. On an earnings basis the bank does not look pricy at all with a trailing earnings multiple of 10. Lansdowne Partners increased its stake in Wells Fargo by 20% between October and December to a total of 18 million shares.
Disclosure: I own no shares of any stocks mentioned in this article.
