Hedge Fund Blue Mountain Capital’s Top Stock Picks for 2013

Within several weeks after the close of a quarter, hedge funds and other major investors are required to issue 13F filings which are then made public. These filings disclose many of a fund’s long equity positions. One application of these filings is to pool them and use them to develop trading strategies. For example, in our August newsletter we listed the most popular small cap stocks among hedge funds- a set of stocks which then outperformed the S&P 500 by 18 percentage points between September and January (read more about our hedge fund strategies).

News Corp (NASDAQ:NWS)

However, 13F filings can also be used to see what an individual hedge fund likes- not necessarily to be taken at face value, but there’s nothing wrong with thinking of these hedge fund filings as free recommendations that an investor can take or leave at will. Read on for our thoughts on five of Blue Mountain Capital (a hedge fund managed by Andrew Feldstein and Stephen Siderow)’s largest holdings as of the beginning of January or compare them to previous filings.

The fund owned 2.4 million shares of News Corp (NASDAQ:NWSA), about the same size position it had reported at the end of September. News Corp is in the process of splitting into two media companies, a situation that has attracted a number of hedge funds; the breakup should have many of the same attributes as a spinout, which is often mentioned as an attractive investment opportunity because management of the new company can better focus on their own operations (read more about why hedge funds like investing in spinouts). However, the stock is priced such that the breakup will have to improve efficiencies: the trailing P/E is 26.

Blue Mountain reported a position of 2.6 million shares in Dynegy Inc. (NYSE:DYN), a $2 billion market cap electric utility. The company is actually unprofitable on a trailing basis and expected to report negative earnings in 2013 as well. Further, as might be expected for a utility, revenue was up only slightly in its most recent quarterly report compared to the same period in 2011. The most recent data shows that 11% of the company’s outstanding shares are held short. Given all this, we would avoid the stock at this time.

See three more of Blue Mountain’s favorite stocks:

Domtar Corp. (NYSE:UFS) as another of Blue Mountain’s investment team’s top stock picks as the fund owned about 580,000 shares, up from about 490,000 shares at the end of September. Gates Capital Management, managed by Jeffrey Gates, had owned slightly over 900,000 shares of the $2.8 billion market cap paper and personal products company at that time (check out Gates’s stock picks). Domtar’s industry is not particularly attractive- and, in the third quarter of 2012, its earnings dropped 44% on a small decline in revenue- but the valuation is at least cheap at 13 times trailing earnings. That isn’t quite cheap enough for us to get interested in a paper company, however.

The fund added shares of American International Group, Inc. (NYSE:AIG) to its portfolio as well, beginning the year with 1.3 million shares of the insurer in its portfolio. Blue Mountain had started buying AIG in the third quarter of 2012, when AIG won a place as one of the most popular stocks among hedge funds (see the full top ten list). AIG is currently valued at 0.6 times the book value of its equity, and while we can certainly see why it would be trading at a discount to book we think that the stock has a good deal of upside from its current levels- a P/B of 0.7 or 0.8 would seem more appropriate. AIG trades at 11 times consensus earnings for 2013.

Blue Mountain’s investment team slightly increased their holdings of Hanesbrands Inc. (NYSE:HBI),reporting that the fund now owns 1.2 million shares. The apparel company is something of a growth play: bottom-line growth has been very good but the stock carries trailing and forward P/Es of 30 and 11 respectively. This implies a steep improvement in earnings this year, something we would be careful of relying on, and so we likely wouldn’t buy the stock. Robert Bishop’s Impala Asset Management owned 1.6 million shares of Hanesbrands at the end of September (find Impala’s favorite stocks).

Disclosure: I own no shares of any stocks mentioned in this article.

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