Billionaire Louis Bacon’s New Stock Picks Include Bank of America

We have done research on 13F filings and have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year (learn more about our small cap strategy). These filings, each of which discloses many of a hedge fund’s long equity positions as of the end of the quarter (the end of Q4 2012 in this case), can be a useful source of information in other ways. We like to analyze filings from individual funds to see what their top picks were and also to see what new stocks they had added since the previous quarter. We have gone through the newest 13F from billionaire Louis Bacon’s Moore Global (see the full list of stocks from the filing) and here are our thoughts on that fund’s five largest new holdings:

MOORE GLOBAL INVESTMENTS

Moore’s largest new stock pick was Bank of America Corp (NYSE:BAC), reporting a position of almost 12 million shares. Bank of America was one of the most popular financial stocks among hedge funds in the fourth quarter of 2012 (find more financial stocks hedge funds love). There is a large discrepancy between the bank’s value in terms of the book value of its equity (the P/B ratio is a low 0.5) and what happens when we look at the state of its business (plunging revenue and earnings last quarter compared to the fourth quarter of 2012, and a high trailing P/E). Other large banks are more expensive on a book basis but might be less risky.

Another popular stock- in fact, the new most popular stock among hedge funds- that Bacon was buying between October and December was American International Group Inc (NYSE:AIG). See what other stocks rounded out the top five. AIG also trades at a significant discount to book value, with a P/B of 0.6, and at 9 times analyst expectations for 2014. Our thinking in regards to AIG is that while the company has not yet proven reliably enough to merit trading at book value it’s likely that a smaller discount is appropriate. A crucial factor will be how quickly mutual funds and other institutions move back into the stock.

Read on for three more new stock picks, including a major media company:

LinnCo, LLC (NASDAQ:LNCO) was another of Moore’s new stock picks. Linn is an acquirer of oil and gas acreage in the onshore United States. At a market capitalization of $1.3 billion, it trades at 20 times analyst consensus for 2013. Linn went public in October and is about flat from its levels shortly after that time; it has made two dividend payments, which when annualized imply a dividend yield of over 7%. As a result income investors who are comfortable looking at recent IPOs could look into the sources of its cash flow and see that they are stable enough to support continued payments.

Bacon and his team bought 2.5 million shares of property and casualty insurance company Hartford Financial Services Group Inc (NYSE:HIG) in the fourth quarter of 2012. HIG is another case where the market does not trust the internal asset valuations, judging by the price-to-book ratio of 0.5. However, 10% of the outstanding shares are held short, showing a significant bearish community, and when comparing the current valuation to earnings the company looks in line with Bank of America- the value case there being dependent on significant bottom-line improvement. Billionaire John Paulson’s Paulson & Co. is another major investor in HIG (check out Paulson’s stock picks).

A new position of 1.1 million shares in News Corp (NASDAQ:NWSA) rounded out Moore Global’s top five new holdings. Hedge funds often like to invest in spinouts, as management is better able to focus on operations without having to concern themselves with the larger business (read more about investing in spinouts). The breakup of News Corp will create a similar situation in the mind of many investors, and we have tracked a number of hedge funds owning News Corp. It is the top consumer services stock among hedge funds per our database (research more consumer services stocks hedge funds are excited about).

Disclosure: I own no shares of any stocks mentioned in this article.