Hedge funds are an important indicator for every investor to track. Though it’s possible to get bogged down in the industry’s collection of 8,000-plus funds, we at Insider Monkey parse this data, and track the best picks of the top 450 money managers. Historically, our small-cap strategy beat the market by 18% a year for more than a decade in our back tests, and since we started sharing this strategy with the public, it has returned another 18% in just 5 months (learn how to use this yourself).
Keeping this in mind, it’s also important to deliver actionable investment ideas from this “upper tier,” so to speak. While the Buffetts and the Icahns of the hedge fund world get most of the mainstream media’s coverage, there are plenty of talented managers who are flying under the radar. Let’s take a look at one: Brian J. Higgins’s King Street Capital. King Street’s focus is on distressed companies, equity, bonds, foreign exchange, warrants, and options, and it is particularly talented at it. The fund has never had a down year, and it even reported broke into positive territory by a couple percent in the disaster that was 2008.
King Street has a moderately sized equity portfolio of about $450 million and is heavily invested in the financial and services sectors, which comprise about three-fourths of their total equity holdings. Let’s take a look at the top three stock picks at the end of the fourth quarter, to see how they were preparing for 2013.
Virgin Media Inc. (NASDAQ:VMED) sat atop King Street’s equity portfolio at the end of Q4, as the fund upped its stake by 264% over this three-month period. While we cannot say exactly when these transactions occurred, it’s important to note that VMED stock gained almost 25% in the quarter, and it has risen another 26.5% since the start of 2013.
News originally broke in early February that Liberty Global (NASDAQ:LBTYA) was acquiring the company–the deal is expected to be completed sometime next quarter. Shares of Virgin Media still trade at a 2.9% discount to Liberty’s estimated offer price of $47.87 per share, meaning there’s a bit of a merger arbitrage play still possible, but most of the potential gains have already evaporated.
MGM Resorts International (NYSE:MGM), meanwhile, was King Street’s second largest equity position heading into 2013, and was a new position for the fund in the fourth quarter. On the whole, hedge fund interest in MGM increased by 12% over this period, as peers Paul Tudor Jones, Dmitry Balyasny and Murray Stahl (see Stahl and Horizon Asset Management’s key stock picks here) all established new positions as well. Since the start of the year, these moves have been rewarded quite nicely, as MGM’s stock price is already up almost 7%.
Trading at a 33% discount to sales value parity and a price-to-book multiple of 1.4x, MGM is obviously a value play, and it is cheaper than key peer Las Vegas Sands Corp. (NYSE:LVS) by a significant margin. Vegas Sands sports price-to-sales and price-to-book multiples of 3.8x and 4.6x, respectively, and also has generally lower growth prospects. The sell-side expects MGM Resorts International (NYSE:MGM)’s earnings to grow by close to 62% next year, while its forecast for Vegas Sands is about one-fourth of this level.
American International Group Inc (NYSE:AIG), lastly, was the No. 1 stock of the entire hedge fund industry last quarter (read the details here). King Street established a new position in the leaner, meaner post-bailout insurer in Q4, and American International Group Inc (NYSE:AIG) shares are already up 6.9% year-to-date. Despite this appreciation, the stock still trades at undervalued metrics across the board, including a PEG of 0.14 and a mere 0.55 times its book–sixth lowest in the entire S&P 500-listed financial sector.
Insider Monkey’s small-cap strategy returned 25.4% between September 2012 and January 2013 versus 7.4% for the S&P 500 index. Try it now by clicking the link above.