The services sector of the economy ranges from retail and restaurants to shipping to entertainment. By looking at the 13F filings disclosed by nearly 400 hedge funds and other prominent investors, Insider Monkey analyzed which stocks are hot in the hedge fund world and which ones are cooling down. Here are the 10 most popular stocks in the services sector of the market among hedge funds:
1. Medco Health Solutions (MHS): At the end of March, 68 hedge funds owned shares in Medco Health Solutions, which has since been acquired by Express Scripts (ESRX). Many of these hedge funds, such as Magnetar Capital (see Magnetar’s other stock picks), were likely buying into the company as part of a merger arbitrage strategy. Merger arbitrage is one of the most common hedge fund strategies that can produce relatively small correlations with market returns (read more about merger arbitrage here). The combined company is now a $45 billion market cap market leader in pharmacy benefit management with primary customer Walgreens (WAG).
2. Visa (V): The second most common services stock held by hedge funds was Visa. The credit card issuer could be found in the portfolios of 64 hedge funds, including legendary investor Julian Robertson’s Tiger Management (see more of Julian Robertson’s portfolio) which held $20 million in the stock. 57 hedge funds had held V the previous quarter, indicating that hedge fund positions had generally increased. Visa is up about 21% so far this year, and currently sits at a P/E of about 20.
3. Mastercard (MA): Tiger Management was also an owner of the #3 services stock for hedge funds, Mastercard. The position was roughly the same size as Robertson’s investment in Visa, implying that this value investor sees the credit card business as an attractive investment. There were 57 other hedge funds invested in Mastercard for a total of 58, up from 53 at the end of 2011. Mastercard slightly lags Visa but is still up 16% so far in 2012, roughly doubling the S&P 500’s performance. It does trade at a higher multiple than Visa (at about 27) despite Visa’s status as the market leader.
4. eBay (EBAY): Fourth in the rankings of services stocks was online auction house EBAY, which was held by 54 different hedge funds. Tiger Cub Patrick McCormack’s Tiger Consumer Management (learn more about their stock picks here) owned 2 million shares, a position that the fund had increased 29% since the end of 2011. EBAY’s market cap currently sits at over $50 billion and has continued to grow its revenue over the past couple of years, yet the company trades at a modest P/E of less than 16. Hedge funds are likely buying into EBAY on a value basis and have been rewarded with a 26% increase so far this year.
5. Priceline (PCLN): There were 50 hedge funds with bullish Priceline positions at the end of the first quarter. Priceline, which provides centralized travel planning services including the prospect of discounts for travelers, is priced for growth at a trailing P/E of 29 but Wall Street expects them to deliver (the forward P/E is only 16) and hedge funds such as Stephen Mandel’s Lone Pine Capital, which has Priceline as its third largest position (see Lone Pine’s other stock picks), apparently agree.
6. Amazon (AMZN): There were also 50 hedge funds in Amazon at the end of the first quarter. Amazon is in the midst of expanding its business to include handheld hardware products such as the Kindle line and potentially smartphones as well, with a solid base in the online retail business. It trades at a staggering 177 P/E and here the growth rate is not expected to allow the company to meet this valuation. So far this year, the company is up about 20% benefitting funds such as billionaire Ken Fisher’s Fisher Asset Management (see billionaire Fisher’s stock picks).
7. Lowe’s (LOW): There were 50 hedge funds with LOW positions. Lowe’s is more of a traditional value stock with a price-to-earnings ratio of less than 18 and an enterprise value of just less than seven times trailing EBITDA. Lowe’s was the second-largest holding of Edgar Wachenheim’s Greenhaven Associates, at over 11% of the fund’s $3.3 billion portfolio.
8. Viacom (VIA-B): The stock was owned by 49 hedge funds at the end of March. Priced at a low earnings multiple of 14 Viacom looks like a value stock. Berkshire Hathaway initiated a position in Viacom in the first three months of 2012, buying over $75 million in Viacom stock (see Warren Buffett’s new stock picks), likely attracted to the value nature of the company and possibly its 2.2% dividend yield.
9. News Corp (NWSA): There were 49 hedge funds in News Corp at the end of March. Hedge fund interest in this stock skyrocketed after the price declines due to the scandal in Britain. Recently the company confirmed that it plans to split into two. This should give another boost to hedge fund interest because spin-offs are one of the most popular investment strategies among hedge funds (read about this strategy here).
10. Walgreen (WAG): There were 37 hedge funds with WAG positions at the end of December, but by the end of March that number had increased to 48. One of these new buyers was Robert Pohly’s $3 billion fund Samlyn Capital (learn what else was in Samlyn’s portfolio), which bought over 875,000 shares. WAG trades at a particularly interesting value level with a trailing P/E of 10.4 and a trailing EBITDA multiple of 5.3, although analysts expect little earnings growth this year. The stock is down about 8% over the past three months, so investors have the opportunity to get into WAG at a lower price than these hedge funds.