Despite the fact that hedge funds are often viewed as slow and underperforming investment vehicles of the financial world of yesteryear, there are still ways to parse the data to beat the market. At Insider Monkey, we track the best picks of the best hedge funds, and we’ve used this dual-screening technique to help retail investors achieve stock market superstardom.
Our small-cap strategy outperformed the market by 18% a year for more than a decade, and since sharing these picks with the public last fall, we’ve outperformed the S&P 500 index by 22.5 percentage points in only 5.5 months. We’ve also built the Billionaire Hedge Fund Index in collaboration with MarketWatch, which was up on the general indices by the high-single-digits in 2012.
General Motors Company (NYSE:GM) is the hedge fund manager’s No. 1 stock pick, and it has been a rewarding investment of late. Mignone’s GM position comprises roughly 5.5% of his entire equity portfolio, and shares of the automaker are up 19.2% since the start of the fourth quarter. Wall Street’s average price target on GM represents another 27% upside from current levels.
The crux of this stock’s bullish thesis lies in its ability to provide solid growth at a reasonable price (GARP). Bolstered by strong emerging market demand and its ability to expand assembly operations domestically, the sell-side forecasts EPS growth of 27% next year, and a long-range annual rate of 12-13% through at least 2017. Shares of GM still trade at a meager PEG of 0.77, and are at parity with their book valuation. It’s easy to see why Mignone holds the stock with such high regard.
Morgan Stanley (NYSE:MS) is the hedgie’s second largest equity position, slightly smaller than his stake in GM. Though they operate in completely different sectors, Morgan Stanley’s investment idea is essentially the same: it’s a GARP play. At just over 0.7 times book, shares of MS trade at one of the lowest valuations of all the S&P 500-listed financial stocks, and its growth potential is one of the best. On average, analysts expect Morgan Stanley to generate EPS growth of 16.3% a year over the next half-decade—5th highest in its entire sector.
TripAdvisor Inc (NASDAQ:TRIP), meanwhile, is Mignone’s No. 3 pick, and is also a popular investment choice of Stephen Mandel, Jim Simons and George Soros (check out Soros’s full portfolio here). TripAdvisor has been in Mignone’s portfolio since the first quarter of last year, and over the past twelve months, shares of the online travel company have gained a whopping 42.8%.
Google Inc (NASDAQ:GOOG) has been in TripAdvisor’s proverbial “backyard” ever since its 2011 acquisition of ITA Software, but these are only issues over the long, long term. Looking at a shorter time horizon, TripAdvisor is a strong momentum play, through and through.
Why is this the case?
Earnings growth is expected to average between 21% and 26% over the next two years, and the stock isn’t ridiculously expensive at 20.6 times forward earnings.
Assured Guaranty Ltd. (NYSE:AGO) is Mignone’s fourth largest equity holding, and has been in the hedgie’s top ten since Q4 2011. The mid-sized credit protection company has already popped more than 32% in 2013 alone, hitting a new 52-week high last week. A key factor behind this appreciation was Assured’s court victory against Flagstar Bancorp in early February, and optimism is riding high on the toes of Q4 earnings. Despite their recent run-up, AGO shares still trade at a mere 7.1 times forward earnings and a 26% discount to their book value. Fellow fund managers Debra Fine and Wilbur Ross join Mignone in this stock, which is great company to have.
Google, lastly, rounds out Mignone’s “fab five,” so to speak. The tech giant has already rewarded shareholders significantly year-to-date, returning 13%. Shares trade just off their all-time high north of $800, but there’s still reason to believe in this stock, as it looks like another GARP play. Sell-side analysts expects EPS growth of a little over 17% next year, and over the longer term, forecasts predict annual expansion of 14-15% through at least 2017. Despite these prospects, Google still trades below 15 times forward earnings, and Wall Street’s average price target predicts another 5-6% in upside.
Google was also the third most popular stock among the 450-plus hedge funds we track last quarter, with 126 bulls in the crowd, so to speak. This total was smaller than Apple’s interest of 132 funds, but larger than Microsoft’s 95 total. With strong results like these, it’s always important to pay attention to the smart money, and this time is no different.
Click here to learn more about Insider Monkey’s Hedge Fund Newsletter
Insider Monkey’s small-cap strategy returned 25.4% between September 2012 and January 2013 versus 7.4% for the S&P 500 index. Try it now by clicking the link above.
Disclosure: none
