North Run Capital, which is managed by Thomas Ellis and Todd Hammer, filed its 13F for the third quarter of 2012 with the SEC earlier this month. These filings disclose many of a hedge fund’s or other major investor’s long equity positions to the general public, and investors can use this data to inform their decisions. We think that it can be a good idea to use these filings as initial sources of ideas, doing further research before committing capital. Read on for our quick takes on the fund’s top five positions and compare them to previous filings.
CIT Group Inc. (NYSE:CIT) was North Run’s top stock pick for the third quarter, with the fund reporting a position of 1.5 million shares (up from 1.2 million shares three months earlier). The commercial lender trades at a P/B of 0.9, reflecting that its stock is priced at a small premium to book value. It also trades at a forward P/E of 11, though this is actually a bit higher than some larger financials and we’d prefer to look at those instead. Bruce Berkowitz’s Fairholme had cut its stake in CIT during the second quarter but still closed June with just over 14 million shares, giving it a position worth over $500 million at that time (find more stocks from Fairholme).
North Run also liked Xerox Corporation (NYSE:XRX), upping its share count from 6.9 million at the beginning of the third quarter to 7.6 million at the end of September. In quantitative terms, Xerox looks quite cheap at trailing and forward P/Es of 7 and 6 respectively after tumbling 22% in the last year. The business has been struggling, however, and in the third quarter its revenue was down 3% from the same period in 2011 (which had contributed to a 12% fall in net income). Billionaire David Einhorn’s Greenlight Capital had bought the stock in the second quarter; we might look at it further as a value stock.
Ellis, Hammer, and their team increased their position in Adobe Systems Incorporated (NASDAQ:ADBE) slightly to a total of 1.5 million shares, after having cut its stake last quarter. At a market cap of just over $16 billion, Adobe trades at 21 times trailing earnings despite seeing only modest growth in its business recently. Sell-side analysts are optimistic- the forward P/E is only 14, which would place it much more in value range- but we think that it will be difficult for Adobe to hit that earnings target and that the stock does not look undervalued.
Health care plan provider Health Net, Inc. (NYSE:HNT) was another of North Run’s top picks, with the fund owning 2 million shares. Health Net experienced a 71% decline in earnings last quarter compared to the same period in the previous year despite modestly higher revenue, and as a result the market is skeptical of the sustainability of the company: it trades at a P/E multiple of 12, whether looking at trailing earnings or at analyst consensus for 2013. The fund likely sees the stock as a value play, and we could see keeping an eye on it to see if the business can halt its decline though not buying it yet.
The fund sold shares of Life Technologies Corp. (NASDAQ:LIFE), but kept about 910,000 shares in its portfolio and that enabled it to remain one of North Run’s top five holdings. Life Technologies is an $8 billion market cap medical research and analysis company. It’s similar to Health Net in that the third quarter showed a sharp decline in net income from a year earlier, though the financial community is more bullish on it recovering: the trailing P/E is 20, but the forward earnings multiple is only 11. We think that we’d avoid a stock whose valuation is so dependent on better 2013 numbers.