Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds, including billionaire Paul Singer’s Elliott Management. We’ve developed a portfolio based on our research on 13Fs (which concluded that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) and this portfolio earned an excess return of 33 percentage points in the last 11 months (learn more about our small cap strategy). Of course it can also be useful to treat 13Fs as sources of initial investment ideas, performing further research on any names which seem interesting. Read on for our thoughts on three things we noticed in the filing for the end of June or compare Singer’s picks to those in previous filings.
NetApp. Elliott had owned 1.2 million shares of NetApp Inc. (NASDAQ:NTAP) at the end of March, and over the next three months increased their stake to about 15 million shares. The $15 billion market cap company, which specializes in network data storage and management, had its fiscal year end in April. During its fiscal Q4, revenue and earnings each showed little change versus a year earlier. However, Wall Street analysts are predicting substantial improvements on the bottom line next year and given their expected increase in EPS the forward P/E is only 13. Billionaire George Soros’s Soros Fund Management had reported a position of 3.6 million shares of NetApp Inc. (NASDAQ:NTAP) during the first quarter of 2013 (check out more stocks Soros owned).
Merger arbitrage. Singer and his team increased the size of their position in Dell Inc. (NASDAQ:DELL) to make it their sixth largest holding by market value, and bought 2.3 million shares of pork producer Smithfield Foods, Inc. (NYSE:SFD). Each of these companies is currently a merger arbitrage situation. Dell Inc. (NASDAQ:DELL), of course, has had billionaire activist Carl Icahn successfully push founder Michael Dell and his private equity backers to increase their offering price. Icahn continues to believe that the proposed transaction undervalues the stock, but Dell has changed its voting procedures in a manner which makes it very likely the deal will be approved by shareholders. As such it seems to be a standard merger arbitrage play at this point.
The fun at Smithfield Foods, Inc. (NYSE:SFD), however, is only just beginning. Chinese pork producer Shuanghui has offered $34 per share for the company; the current price is about $33.50. As might be imagined, the potential purchase by a Chinese company has the potential to be politically controversial in the United States. In addition, activist fund Starboard Value has argued that Smithfield could be worth more in a breakup situation and is reportedly speaking with other meat companies who may be interested in portions of the business in order to potentially offer a better deal.
Selling Delphi. Between April and June, the fund sold a significant portion of its shares in Delphi Automotive PLC (NYSE:DLPH), an auto parts company which has been somewhat popular among many hedge funds. Delphi, which focuses on electrical, electronic, and powertrain components, grew its revenue by 6% last quarter compared to the second quarter of 2012 with profits up a little over 10%. The stock has risen close to 90% in the last year, which has brought its trailing earnings multiple up to 16; however, Wall Street analysts consider it undervalued as shown by the stock’s forward P/E of 11 and its five-year PEG ratio of 0.8.
We would hesitate to be too optimistic about Starboard’s efforts at Smithfield- thus far the fund appears to have been spinning its wheels, and investors would be taking the small but still existent risk of Shuanghui’s offer being struck down as well- but given the interest in food stocks this year Smithfield seems to be worth following and certainly Elliott’s interest is worth noting. NetApp Inc. (NASDAQ:NTAP) doesn’t look too attractive at this point given how dependent the company is on hitting analyst earnings targets for next year to justify its current valuation. As for Delphi Automotive PLC (NYSE:DLPH), taking some profits on the stock seems wise but we can understand why Singer and his team kept it in their portfolio given its decent performance according to recent reports.
Disclosure: I own no shares of any stocks mentioned in this article.