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Ken Heebner’s Top Stock Picks Include Citigroup Inc. (C): Morgan Stanley (MS), Lennar Corporation (LEN)

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In February many hedge funds filed their 13Fs for the fourth quarter of 2012. It’s possible to use these filings to develop investment strategies, helping investors earn profits. For example, we have found that the most popular small cap stocks among hedge funds have, on average, produced an excess return of 18 percentage points per year (read more about popular small cap stocks) and we’d imagine other strategies are out there as well. 13Fs are more commonly treated as a list of recommendations from a top investor; similarly to a stock screen, they spit out a few names that can be researched further if a quick look makes them seem appealing. We have gone through the 13F from Ken Heebner’s Capital Growth Management. Here are the five largest positions by market value that the fund owned at the end of December (or see the rest of Heebner’s stock picks):

The largest holding reported in the 13F was 6.5 million shares of Citigroup Inc. (NYSE:C). Citi has climbed 24% in the last year, beating the market, but the bank still trades at a sizable discount to book value with a P/B ratio of 0.7. Large banks have generally been doing well, and Citigroup is no exception with revenue and earnings rising in the fourth quarter of 2012 versus a year earlier. Analysts expect good times to continue, and as a result the stock’s forward earnings multiple is 8 and the five-year PEG ratio is 0.8. We think investors could consider Citigroup Inc. (NYSE:C) though other banks might be better buys. Citigroup was one of the five most popular stocks among hedge funds at the end of December (see more of the most popular stocks).

Investment bank Morgan Stanley (NYSE:MS) was another of Heebner’s favorite stocks. Morgan Stanley, like Citi, carries very optimistic expectations from the Street: consensus for 2014 implies a forward P/E of 8, and looking out further the PEG ratio is 0.6. While the bank did report revenue growth of more than 20% in its most recent quarter compared to the same period in the previous year, the bottom line has been more of a challenge. There could be a value case for Morgan Stanley (NYSE:MS) but we think there are sufficient opportunities elsewhere in financials where performance has been more dependable.

Capital Growth Management increased its stake in Lennar Corporation (NYSE:LEN) by 19% to a total of 4.9 million shares. The homebuilder has soared 63% in the last year as the housing market has turned up; sales have been up 42% contributing to a very high earnings growth rate. Consensus for the fiscal year ending in November 2014 currently implies a forward P/E of 17. Similarly to large banks, we think that investors should be watching housing related stocks but wouldn’t be sure that Lennar Corporation (NYSE:LEN) is the best way to play a housing thesis.

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