At Insider Monkey, we track hedge fund and insider buying activity because these indicators are two of the best ways to accurately gauge the “smart sentiment” surrounding a stock. Generally speaking, corporate executives of mid to smaller-cap companies have a better understanding of their businesses, and our studies prove this. We’ve shown that retail investors can beat the market by 7 percentage points a year by simply following bullish insider trading, and this outperformance stretches to the hedge fund industry as well.
Our Billionaire Hedge Fund Index—created in collaboration with MarketWatch—returned 24.3% last year, beating the S&P 500 ETF (NYSEARCA:SPY) by a handy 8.3 percentage points. In layman’s terms, this indicates that the cream of the crop’s consensus picks can outpace the market, but it’s worth noting that longer-range studies show that the most alpha can be generated from the small-cap space (learn how to use this market-beating strategy yourself).
With this in mind, ardent investors would be best served by determining hedgies’ favorite stock picks that have also been supported by insiders in the last 90 days. One of the most prominent hedge fund managers today is David Einhorn, so it’s worth taking a look. Einhorn’s fund, Greenlight Capital, has returned near 20% annually since its inception in 1996.
According to his latest 13F filing with the SEC, Apple Inc. (NASDAQ:AAPL) has been Einhorn’s No. 1 holding since the third quarter of 2011. Greenlight recently issued a press release showing its displeasure with Cupertino’s capital allocation plans, and it’s likely that many investors agree with Einhorn when he says “Apple Inc. (NADSAQ:AAPL) must examine all of its options to unlock the growing value of its balance sheet for all shareholders.”
Director Robert Iger’s decently sized round of purchasing activity last November has been in vain thus far, but a PEG of 0.75 and a forward earnings multiple below 9.0x indicates that there’s an obvious value play here. A dividend boost or a strengthened share buyback would likely draw more investors into Apple Inc. (NASDAQ:AAPL), and the company’s “secret” hedge fund may be preparing for just such an event.
General Motors Company (NYSE:GM), meanwhile, is a favorite pick of both Einhorn and Warren Buffett (see Buffett’s top stock picks here), and has seen two insiders buying in the past six months. GM has risen more than 11% since the latest exec—Thomas Schoewe—bought shares in November of last year. At 1.07 times its book value, there’s no denying this automaker’s stock is cheap at the moment, and beats in four of its last five earnings reports have investors optimistic on the toes of next week’s Q4 earnings report.
Who's the best of the rest aside from GM and Apple Inc. (NASDAQ:AAPL)?