Richard Pzena Bullish On Banks & Seagate (STX), Adds Hilton (HLT)

“The market has really divided into two groups,” Richard S. Pzena of Pzena Investment Management explained on CNBC last week. There are “those that have really been in sync with a lower-for-longer philosophy” and those who haven’t.

The former group, which comprises not only utilities, but also other “stable, low-volatility, free-cash flowing” stocks like consumer staples and real estate, boasts valuations at “dizzying heights.” On the other hand, the latter, which includes financial services, energy and materials stocks, offers “pretty attractive valuations,” he explained.

“We have this interesting tradeoff today, where you can buy a bank at a discount to book-value, earning a reasonable return… so you get kind of 10% yield, including the stock repurchase. And, if interest rates go up, you make a fortune, and if interest rates stay where they are, you make 10% a year… If the bad outcome is making 10% a year, why wouldn’t you put all of your money into that kind of an investment?” Pzena added.

So, without further ado, let’s take a look into Pzena’s stakes in financial stocks, and some other interesting large positions held by the investor. Afterwards, check out our list of The 100 Best Finance Blogs: All The Internet’s a Stage for further insight on investing.

At Insider Monkey, we track more than 750 hedge funds, whose 13F filings we analyze as part of our small-cap strategy. Our research has shown that imitating a portfolio that includes the 15 most popular small-cap stocks among hedge funds can outperform the market by as much as 95 basis points per month on average (see more details).

Citigroup Inc (NYSE:C)

Let’s start with Citigroup Inc (NYSE:C), which Pzena Investment Management held 9.64 million shares of on June 30, valued at more than $408 million. Today, the stock offers a 9% return on equity, “way below its historic nuance, primarily because interest rates are low,” Richard Pzena offered. “Stock is at 75% or 80% of book-value. So that means I’m making 12%, because I’m buying it below book value, and they are paying out nearly all their earnings in dividends and stock repurchases,” he continued. Moreover, Pzena noted that the company’s earnings could be “substantially higher if interest rates go up or if they do something without interest rates going up,” and that its CEO is taking numerous steps to accomplish this.

Citigroup Inc (NYSE:C) was held by 97 funds among those we track at the end of the second quarter. Among them was Harris Associates, which held 28.35 million shares on June 30. Over the third quarter, Ken Fisher’s Fisher Asset Management trimmed its Citigroup holding by 32% to 8.21 million shares on September 30.

Bank of America Corp (NYSE:BAC)

Another financial stock that Pzena holds is Bank of America Corp (NYSE:BAC), to the tune of 30 million shares worth more than $397 million at the end of June. This made it one of the largest hedge fund investors of record, trailing only three firms, among which was Robert Rodriguez and Steven Romick’s First Pacific Advisors with 32.79 million shares.

Despite having experienced plenty of volatility over the year, shares of Bank of America Corp (NYSE:BAC) are trading around the same level as they were in early-January. However, they have been in rebound mode since late-June, regaining 38% of their value. Just last week, the company posted third quarter EPS of $0.41 on revenue of $21.64 billion, beating the Street’s consensus estimates by $0.08 and $700 million, respectively. Other important figures included non-interest expenses of $13.5 billion, down by 3%, provisions of $850 million, up from $806 million a year earlier, and net charge-offs of $888 million, down from the year-ago period’s $932 million.

Head to the next page for a discussion of three more positions held by Pzena Investment Management.

Morgan Stanley (NYSE:MS)

Before moving on to other sectors, let’s take a look at one more position Pzena has in the financial sector: Morgan Stanley (NYSE:MS). As of June 30, the firm owned 12.89 million shares of the bank, or about $335 million in stock. This made it the largest hedge fund investor of the company in our database. Also bullish on Morgan Stanley was Ric Dillon’s Diamond Hill Capital, which disclosed ownership of 12.14 million shares of the company as of June 30.

Morgan Stanley (NYSE:MS) has also had a very volatile year, but has ultimately managed to return more than 5.5%. Moreover, since its late-June lows, it has rebounded by more than 42%. Same as Bank of America, the company delivered strong results last week, with third quarter EPS of $0.81 and revenue of $8.91 billion beating estimates by $0.18 and $740 million, respectively. Following the announcement of those robust figures, Guggenheim upgraded the stock to ‘Buy’, citing the company’s ameliorated asset composition and revenue mix. The firm has a $39 price target on the shares, more than 10% beneath their current price.

Hilton Worldwide Holdings Inc (NYSE:HLT)

Moving outside of the financial world, Pzena disclosed a new position in Hilton Worldwide Holdings Inc (NYSE:HLT), which will split into three separate companies by the end of the year. “The company’s depressed because it’s in lodging and people are fearful that we’re near the end of the upcycle in lodging,” he explained. However, he added, the split could generate about 20% upside in the near-term. On Wednesday morning, the company reported third quarter EPS of $0.23, in-line with the Street’s consensus, on revenue of $2.94 billion, which fell $50 million short of expectations.

Bad news aside, a couple of other funds long Hilton Worldwide Holdings Inc (NYSE:HLT) as of the end of the second quarter were Peter Adam Hochfelder’s Brahman Capital, with 8.46 million shares valued at more than $190 million on June 30, and Anand Desai’s Darsana Capital Partners, with 8 million shares.

Seagate Technology PLC (NASDAQ:STX)

Finally, there’s Seagate Technology PLC (NASDAQ:STX), a company that’s undergoing a restructuring aimed at reducing its overcapacity, created by the transition to the cloud. The company’s most recent quarterly results showed rising gross margins and robust volume on the enterprise front, the latter of which Pzena believes is the stock’s story right now: “It’s a replacement of storage in the cloud rather than in the device,” he said.

As of June 30, Pzena Investment Management held 15.5 million shares of Seagate Technology PLC (NASDAQ:STX), valued at more than $377 million. Also long the stock were Anand Parekh’s Alyeska Investment Group, with 420,395 shares, and Jason Karp’s Tourbillon Capital Partners, with 350,000 shares.

Disclosure: Javier Hasse holds no interest in any of the securities or entities mentioned in this article.