Betting on banking
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).