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Citigroup Inc. (C), Morgan Stanley (MS): Billionaire Louis Bacon’s Key Moves

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With personal wealth in excess of $1.5 billion, billionaire Louis Bacon, founder of Moore Capital, manages more than $15 billion. Bacon and his fund use a global macro strategy to invest. Last quarter, he made some big bets on banks, while also upping his stakes in other areas. Outlined below is what Bacon is betting on (check out Bacon’s top stock picks).

Betting on banking

Citigroup Inc.Bacon’s top stock at the end of the first quarter was Citigroup Inc. (NYSE:C), making up 4.7% of his fund’s portfolio. Right from the get go, we see that Citigroup Inc. (NYSE:C) trades at an attractive valuation; Citi trades at a price to earnings ratio of less than 10 times, a 17% discount to the industry average. As well, on a price to book basis the stock trades at a 36% discount to the industry average.
Citigroup Inc. (NYSE:C) also passed the 2013 stress test and received approval for $1.2 billion worth of share repurchases through the first quarter of 2014. Citigroup Inc. (NYSE:C) is also looking to grow nicely from exposure in international markets; the bank has identified opportunities in emerging markets, where GDP is expected to grow faster than in developed markets.

Other keys for the company include the dwindling of its legacy problem asset portfolio, Citi Holdings. Citi Holdings assets decreased 31% from the end of 2011 to 2012, and made up only 8% of the bank’s total assets at the end of 2012.

Citigroup Inc. (NYSE:C) commands sizable interest from major hedge funds, with a total of 118 hedge funds long the stock. This includes the top hedge fund owner by shares, Pzena Investment Management, with a $397 million position, and billionaire David Tepper of Appaloosa Management, who has a $376 million position (see Appaloosa’s top picks).

Another bank bet is Morgan Stanley (NYSE:MS) ; Bacon added Morgan to its portfolio last quarter. Earlier this year, Morgan Stanley (NYSE:MS) received approval to acquire the remaining 35% stake in Morgan Stanley Wealth Management (MSWM), a joint venture between Morgan Stanley (NYSE:MS) and Citi-Smith Barney. With control of MSWM, Morgan will have one of the largest retail platforms.

Although Morgan Stanley (NYSE:MS) saw a 19% decline in revenue in 2012, the bank is expected to rebound nicely, growing some 24% in 2013, driven by a focus on global wealth management, which accounted for over 50% of 2012 revenue, up from 30% in 2007.

Morgan Stanley (NYSE:MS) also appears to be rather cheap, trading at 11 times earnings, while the industry trades close to 19 times. The bank also has a price to book of only 0.7, a 56% discount to the 1.6  industry average.

Bet on Big Blue

Bacon added heavily to a few of his key positions last quarter.

The first of these is International Business Machines Corp. (NYSE:IBM) , in which Bacon’s fund upped its shares owned by 3,400%, making the stock the fund’s 10th largest holding.

International Business Machines Corp. (NYSE:IBM) managed to post first quarter earnings per share of $3.00, compared to $2.78 for the same quarter last year and just below consensus. Revenue is expected to grow a mere 0.5% in 2013. Weak demand remains a big concern, with higher-margin software deals slipping during the first quarter year-over-year.

However, growth in emerging markets should aid revenue, as well as margin expansion from higher-margin software. IBM does pay investors a dividend yield of over 1.5%. IBM counts billionaire Warren Buffett as its top hedge fund shareholder with over 68 million shares (check out Buffett’s cheap stock picks).

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