Joel Greenblatt’s Top Five New Positions From Q4

Hedge funds continue to disclose their long equity positions as of the end of the fourth quarter of 2013. We have found that the most popular small cap stocks among hedge funds outperformed the market by 18 percentage points even though we started measuring the returns a couple of weeks after 13Fs have been made public. It can also be productive to treat individual 13Fs as free recommendations from fund managers- not necessarily to be followed, but to be considered briefly and then researched further if they seem appealing.

In this article, I will look into Joel Greenblatt‘s Gotham Asset Management‘s recently filed 13F form, and succinctly analyze its new stock positions (in which it invested more than $380 million). This value-oriented services-technology-and-consumer-goods focused hedge fund has an equity portfolio worth more than $4.2 billion,

GOTHAM ASSET MANAGEMENT

In Q4, Gotham placed its biggest new bet on Spirit AeroSystems Holdings, Inc. (NYSE:SPR), an independent, non-aircraft original equipment manufacturer, parts designer, and manufacturer of commercial aerostructures, as well as an independent supplier to both The Boeing Company (NYSE:BA) and Airbus Group NV (EPA:AIR). Despite the company’s razor thin margins and returns, and sky-high valuation (at 158 times its earnings, versus an industry average of 18.7x) Greenblatt’s fund acquired 626,000 shares, valued at approximately $21.3 million.

It looks like Gotham is betting on growth: analysts expect the company to deliver an average annual EPS growth rates around 71%-72% over the next five years.  The expansion should be mainly fueled by Boeing and Airbus’ demand (which constitute 95% of its revenue). Boeing, particularly, will be increasing the production of its 787 aircraft, which should drive revenue growth over the past several years. I should highlight that Spirit AeroSystems Holdings, Inc. (NYSE:SPR) enjoys of long-term, sole-source contracts, which assure demand for its products for some years, yet.

Gotham’s second-largest new position was started at Amdocs Limited (NASDAQ:DOX), a software products and services provider for the communications, media and entertainment industries. The fund acquired 363,800 shares of the company and has already perceived an upside of about 10%. The holding is valued at roughly $15 million, and should continue to rise on the back of the company’s innovative nature, pricing power and long-term service contracts.

Another interesting case is that of Pentair, Ltd. (NYSE:PNR), a $15.6 billion market cap company that delivers products, services, and solutions for water and other fluids, thermal management, and equipment protection around the world. Despite the company’s very poor margins and returns and astronomic valuation (at 151 times the company’s earnings, compared to an industry mean of 20.6x), both hedge funds and analysts seem to love this stock. Long-term growth projections slightly surpass its industry’s standards, and a moated business assures profitability going forward. This might be the reason behind Gotham’s purchase of 159,800 shares, which are worth about $12.41 million.

Fourth in line is LifePoint Hospitals, Inc. (NASDAQ:LPNT), an acute care hospitals operator in the U.S., with a market cap of $2.5 billion. Having boosted industry leading revenue growth rates over the past few years, the company is expected to continue to deliver rates around 9% for the years to come. Valued at 20 times the company’s earnings, the stock trades at a discount to the industry average of 24x. Taking advantage of this, Gotham currently holds 226,700 shares of the company, with a value of $11.98 million

Finally, there’s Scotts Miracle-Gro Co (NYSE:SMG), a manufacturer and marketer of consumer lawn and garden products with a market cap of $3.6 billion, in which Greenblatt revealed ownership of 164,200 shares, worth $10.22 million. Although the stock trades at 22 times the company´s earnings, widely surpassing its industry´s average valuation of 13.5 x P/E, it makes it up with a 3% dividend yield and very decent long-term EPS growth projections.

Disclosure: Javier Hasse holds no position in any stocks mentioned

Recommended Reading:

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