A look at hedge fund manager Whitney Tilson’s recent investor letter proved interesting. The letter could well offer investors a starting point for analyzing some well-known companies in the financial industry that Tilson is heavily invested in (check out all of Tilson’s picks).
Tilson split from partner Glenn Tongue in mid-2012 and now manages money on his own. As part of the split, Tilson vowed to raise his hedge fund’s cash level to 70% in an effort to reallocate the funds on a long/short basis, looking to move toward a 100% long and 40% short blend.
Per his letter, Tilson has vowed to concentrate his funds in only his “very best, carefully researched investment ideas.” Tilson’s ideal number of stocks owned includes fifteen positions on the long side and a similar number on the short side.
With that in mind, let’s see what Tilson’s top five (check out six thru ten) ‘carefully researched’ investment ideas are on the long side, his top pick is Berkshire Hathaway Inc. (NYSE:BRK.B). The holding company owns subsidiaries engaged in a number of industries. Berkshire also owns and operates a number of other businesses engaged in a variety of activities. Its insurance segment accounts for around 25% of revenues, which includes GEICO and General Re. The other major segment is the regulated utility business (around 20% of revenues) and includes MidAmerican and Burlington Northern Santa Fe Corp.
The insurance segment is the real growth driver, where it managed to increase its float, which is the money held between the time policyholders make their payments to when the money is paid out in claims, to $65 billion from $28 billion over the last ten years. Meanwhile, its utility business, driven by Burlington Northern, should see an uptrend in revenues with GDP growth in the next few years.
In his letter, Tilson noted that Berkshire is indeed firing on all cylinders. Per his letter, Tilson outlines that he believes Berkshire’s “intrinsic value is likely to grow at roughly 10% annually.”
American International Group, Inc. (NYSE:AIG) continues to trade at half its book value and is Tilson’s second largest pick. AIG is a vastly different company than it was when the government intervened a few years ago. After a string of losses from 2008 to 2010, AIG posted an operating profit of $1.3 billion in the second quarter of 2011. Operating results were also strong for first nine months of 2012, posting operating income of $7.64 billion, versus a loss of $2.6 billion for the same period a year ago.
The U.S. Treasury ended its ownership of AIG in mid-December after selling its remaining 34 million shares and the company has also been streamlining its operations to work itself back as a primary property and casualty operator, having sold off a majority of its airline leasing operations and its remaining stake in an Asian life insurer.
Tilson believes the stock is “worth at least 1x book value, so I expect it will double in the next 2-3 years.” During the fourth quarter, AIG over took Apple as the most owned stock by hedge funds (sell the top five).
Howard Hughes Corp (NYSE:HHC) is Tilson’s third largest long position. Billionaire Bill Ackman is also a big fan of Howard Hughes (see all of Ackman’s stocks). These two hedge fund managers have a number of investments in common, including Tilson’s seventh largest holding, Canadian Pacific.