Several weeks after the end of each quarter, hedge funds and other notable investors file 13Fs with the SEC to disclose many of their long equity positions. We track these filings as part of our work developing investment strategies; we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year on average (learn more about our small cap strategy) and our own portfolio following this strategy beat the market by 33 percentage points in the last 11 months. 13Fs are also useful, of course, for checking in on what top managers have been up to and seeing if they have any interesting ideas. We have gone through the most recent filing from billionaire Nelson Peltz’s Trian Partners, for the end of June, and compared it to previous ones (see a history of Peltz's stock picks). Here are three trends which we noticed in our analysis:
DuPont. It was recently revealed that Peltz and his team have taken a large position in chemicals and technology-related materials company E I Du Pont De Nemours And Co (NYSE:DD), and the filing disclosed ownership of 5.8 million shares as of the beginning of July. More recent reports have placed the fund’s position at over 20 million shares. Trian has discussed plans to create shareholder value with E I Du Pont De Nemours And Co (NYSE:DD) management; when we had first reported on the fund’s position we had noticed that the agriculture related segment, a major source of operating income for the company, may be more valuable if it were separated (one way or another) from the better known performance materials business. There is no indication that this specific move is Peltz’s plan, however. E I Du Pont De Nemours And Co (NYSE:DD) increased its quarterly dividend to 45 cents per share earlier this year, and now pays a yield of 3%. John Levin’s Levin Capital Strategies had been buying the stock in the first three months of 2013 (see Levin's stock picks).
Moving up the income ladder. While Family Dollar Stores, Inc. (NYSE:FDO) was still one of Trian’s largest positions at the end of June, the fund had reduced its stake in the dollar store to 8.4 million shares. At the same time, the investment team was buying 2.1 million shares of auctioneer Sothebys (NYSE:BID). We’d say that these moves taken together imply a view that a larger portion of spending is shifting towards luxury purchases by the wealthy. It’s also the case that because of the nature of demand for these companies’ services, Family Dollar Stores, Inc. (NYSE:FDO) is a defensive stock (beta of 0.4) while Sothebys (NYSE:BID) is tied closely to macro factors (beta of 2.8).
Family Dollar Stores, Inc. (NYSE:FDO) trades at 20 times trailing earnings, even to slightly above with where other dollar stores are trading and certainly a premium compared to big-box discount retailers such as Wal-Mart Stores, Inc. (NYSE:WMT). In addition, the company’s net income actually declined in its most recent quarter compared to the same period in the previous fiscal year, and as a result we would avoid it in favor of its peers. Sothebys (NYSE:BID) has been growing its profits, according to recent reports, but revenue numbers have been flat and so we would worry about the sustainability of higher earnings numbers. With a forward P/E of 20- and that figure assumes a significant increase in EPS next year- it also seems aggressively priced and in fact 10% of the float is held short.
Lazard. The fund bought about 1 million shares of pure-play investment bank Lazard Ltd (NYSE:LAZ) last quarter for a total of 6.7 million shares in the filing. The company’s revenue increased 14% last quarter compared to the second quarter of 2012, but net margins shrunk and as a result profits showed little change. At its current market capitalization of $4.4 billion, Lazard Ltd (NYSE:LAZ) is valued at 15 times forward earnings estimates which makes for a premium price compared to larger investment banks.
We are skeptical of Trian’s move into buying more Lazard Ltd (NYSE:LAZ), since it doesn’t appear to be a particularly good value, and could say the same of both Family Dollar and Sothebys (NYSE:BID) as well. E I Du Pont De Nemours And Co (NYSE:DD) features more moderate earnings multiples and so if the company could reverse its recent decline in earnings it could be an interesting pick. While it might not be such a good buy right now, we’re quite interested in what Peltz’s plans are and whether or not they might be successful in bringing about improvement in the financials.
Disclosure: I own no shares of any stocks mentioned in this article.