Harvard’s Top Stock Picks

Harvard Management filed its 13F earlier this month, reporting many of its long equity positions as of the end of September. Many of the endowment’s holdings are not reported on the 13F (see previous filings from Harvard Management), and as with many other institutions a good deal of investments are managed by other funds. In addition, some large positions are in exchange-traded funds which give the endowment exposure to a particular desired country or industry. Here are five of the largest stock positions that Harvard Management did report:

Jane Mendillo

Mendillo and her team held their position of 2.6 million shares in Pebblebrook Hotel Trust (NYSE:PEB), a real estate investment trust that owns hotel properties including the Doubletree hotel and conference facility in Bethesda. Its dividend yield of 2.4% is low for an REIT, and its $77 million of operating cash flow on a trailing basis (earnings are generally not very useful in evaluating an REIT) compares with a $1.2 billion market cap. We don’t have much experience evaluating REITs and so we would pass, but investors with more familiarity may appreciate learning about Harvard’s stake here.

Kenexa Corporation (NYSE:KNXA) was another top pick with Harvard Management reporting ownership of 1 million shares at the end of September. Kenexa is an HR management software company whose products help businesses with their recruiting and other functions. Its stock is very sensitive to the overall market, with a beta of 2.8; the stock had been doing well this year even before the company received a buyout offer from IBM in August. At a current price of $45.90 and the transaction set to close at $46 per share, there may not be much room here for a retail investor to get involved. We noted in preparing this analysis that many of Harvard’s top picks as of the end of September were acquisition targets, including some that had closed this quarter. Read more about why large investors like merger arb investments.

The endowment owned about 980,000 shares of $90 billion market cap telecom company America Movil SAB de CV (NYSE:AMX) at the end of September. America Movil is an interesting find: its revenue was up slightly in the third quarter versus the same period in 2011, and higher margins drove net income up 67%. Yet its multiples look appealing: the stock trades at 13 times trailing earnings and 11 times forward earnings estimates. Carlos Slim’s top holding looks like it could be a good value. Tiger Cub John Griffin’s Blue Ridge Capital initiated a position of 4.6 million shares during the second quarter.

Harvard Management reported owning 3 million shares of Hudson City Bancorp, Inc. (NASDAQ:HCBK), a $4 billion market cap retail bank holding company. Hudson City reported poor results last quarter, with revenue and earnings falling at double-digit rates from their levels in the third quarter of 2011. At a 4% dividend yield it might be considered an income stock but we’d warn that dividend payments were essentially cut in half in early 2011. It does trade at a discount to book value, but so do many other more prosperous and larger banks; investors interested in financials might want to look elsewhere.

Another takeover target in the endowment’s portfolio was AMERIGROUP Corporation (NYSE:AGP), which is scheduled to be acquired by fellow health insurance company WellPoint in Q1 2013 at about $92 per share (the current price is $91.40). Its trailing P/E multiple is 36, which would be quite high if the transaction does not close for some reason. If it does close then it’s possible that a highly leveraged investor could earn a small positive return on an investment, but as with Kenexa the economics probably would not work for most retail players.

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