Billionaire James Dinan’s Top Stock Picks

YORK CAPITAL MANAGEMENTJames Dinan runs York Capital Management. He founded the firm in 1991 with $3.6 million from mostly colleagues at the investment bank Donaldson, Lufkin & Jenrette (DLJ), which was bought by Credit Suisse in 2000. In 2010, Dinan sold a 30% stake in York to Credit Suisse for a reported $425 million. York, which manages $15 billion in AUM, generated net returns of 40% in 2009 and 7.5% in 2010 but was down 5.9% last year.

Here are James Dinan’s top 10 stock picks at the end of March:

Company Ticker Value ($000s) Activity
DOLLAR THRIFTY AUTOMOTIVE DTG 428,101 0%
CITIGROUP INC C 322,238 96%
GOODRICH CORP GR 302,129 1%
HERTZ GLOBAL HOLDINGS HTZ 295,389 62%
GENERAL MOTORS CO GM 234,977 11%
BANK OF AMERICA CORP BAC 226,972 585%
TYCO INTERNATIONAL TYC 221,911 87%
SARA LEE CORP SLE 179,654 58%
ISHARES TRUST IWM 167,690 24%
CATERPILLAR INC CAT 162,177 New

New additions to York Capital this quarter include Caterpillar (CAT), Illumina (NYSE:ILMN), United Rentals (URI), Teradata (TDC), and United Technologies (UTX). Big additions were made to Bank of America (NYSE:BAC), Citigroup (NYSE:C), British Petroleum (BP), Tyco (TYC), and Chemtura (CHMT). With Roche walking away from ILMN after refusing to offer more than $51.00, we think there’s an interesting opportunity to buy as shares dip. ILMN has an attractive portfolio of genetic analysis solutions that plays well into molecular diagnostics, which we think other large companies would be interested in buying. Admittedly, we were somewhat surprised to see Roche walk away. While its current portfolio does demonstrate some pipeline optionality including T-DM1 for breast cancer, Actemra for rheumatoid arthritis, and pertuzumab, the company would benefit from a genetic research platform. ILMN’s competitors like Affymetrix (AFFX) and Sequenom (SQNM) are not as attractive takeover candidates, in our opinion, in part because they are too small to move the needle for a large company and in part because of a dearth of forward estimates from sell side research. Because some of the smaller biotech companies do not have positive earnings yet, we look at basic valuation using TTM (trailing twelve months) price to sales metric. ILMN trades at 4.8x, AFFX at 1.3x, and SQNM at 7.5x.

James Dinan boosted his stakes in Citigroup by 96% and Bank of America by nearly 600% during the first quarter. Investors are staying away from financial stocks because of concerns about the European debt crisis but hedge funds are getting increasingly bullish about the sector. Citigroup is the fourth popular stock among hedge funds, followed by Bank of America (see the 10 most popular stocks). Wells Fargo (WFC) and JP Morgan (JPM) aren’t far behind. These stocks are extremely undervalued based on their long-term normalized earnings. Citigroup has a 2012 forward PE ratio of 7.3 whereas Bank of America trade at a 2013 forward PE ratio of 7.4. Wells Fargo is the least attractive in this group with a 2012 forward PE of 10.1. Despite its recent $2+ billion trading losses JP Morgan offers the best risk-return combination with a 2012 price-earnings multiple of 7.6. The stock also yields nearly 3.5%. Billionaires Ken Fisher, John Paulson, and Leon Cooperman are among fund managers with large JPM positions (see John Paulson’s new stock picks).

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