What Are Hedge Funds Buying Right Now?: Arris Group, Inc. (ARRS) and More

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OMEGA ADVISORSWhen hedge funds or other major investors buy enough shares to give themselves 5% ownership of a company, or if they subsequently make significant changes to that position, they must file either a 13D or a 13G with the SEC. This provides a relatively recent take on what a particular fund manager thinks about a particular stock. While the nature of the 5% threshold means that we usually only see 13D and 13G filings for small-cap and mid-cap stocks rather than big names, it can actually be particularly useful to see how hedge funds are trading smaller-cap stocks.

This is because these companies receive less attention from mutual funds and the financial media and so are more likely to be found mispriced when a hedge fund’s research team investigates. In fact, the most popular small cap stocks among hedge funds, as listed in our August 2012 newsletter, achieved an excess return of 18 percentage points between September and January (read more about our hedge fund strategies). Here are five stocks regarding which hedge funds have filed 13Ds or 13Gs recently:

Billionaire Leon Cooperman’s Omega Advisors owns over 55 million shares of Chimera Investment Corporation (NYSE:CIM) per a recent filing (see more of Cooperman’s stock picks). Omega likes high yield stocks, and as a real estate investment trust Chimera is actually required to distribute a large share of its taxable income to shareholders. It has made quarterly payments of 9 cents per share the last three quarters (though dividend payments were higher before that) which implies an annual yield of close to 12%. We would note that Chimera has fallen behind in filing its financial statements.

Fellow billionaire Steve Cohen and his investment team at SAC Capital Advisors reported ownership of 5.7 million shares in Arris Group, Inc. (NASDAQ:ARRS), a $1.9 billion market cap communications equipment company. Find Cohen’s favorite stocks. While the trailing earnings multiple is high, analyst consensus implies a current-year P/E of only 14 and Arris did experience a 22% increase in revenue and a large increase in operating income last quarter compared to the fourth quarter of 2011. The stock might not be as good a value as Cisco but could still be worth considering.

Pine River Capital disclosed a position of 3.1 million shares of PHH Corporation (NYSE:PHH), which operates a mortgage servicing business and offers vehicle leasing services; Pine River is managed by Brian Taylor. While PHH struggled earlier in 2012, a strong fourth quarter pulled it into the black for the year. The trailing P/E is still high, but the stock trades at only 8 times earnings estimates for this year and at a moderate discount to the book value of the equity. We had thought it might look more attractive if it can continue its profitability for another quarter or two.

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