We track 13F filings from hedge funds and other notable investors because- even with the stock holdings listed on these filings being from the end of the quarter, generally six to seven weeks before the filing is made public- we believe that there are a couple different techniques that investors can sue to profit from them. It’s actually possible to develop successful investment strategies based on 13Fs; the most popular small cap stocks among hedge funds, for example, tend to outperform the S&P 500 by 18 percentage points per year on average (learn more about our small cap strategy). We also like to provide a brief overview of what hedge fund managers are doing so that investors can follow up on any interesting stock ideas.
Billionaire David Einhorn of Greenlight Capital is one of the most closely followed hedge fund managers in the world. At a recent investor presentation, after describing a short thesis for Green Mountain Coffee Roasters, he said in transition to his next topic “if you take the CR away from GMCR, you get GM.” General Motors stock dropped nearly instantly, before recovering as it became clear that the fund was actually long GM. Read on for some themes we noticed in this most recent 13F when compared to previous filings.
Consumer technology. Greenlight added shares of both Apple Inc. (NASDAQ:AAPL) – which remained the fund’s largest holding by market value- and Microsoft Corporation (NASDAQ:MSFT). The fund now owns 1.3 million shares of the former and close to 11 million shares of the latter. Wall Street analysts are quite bullish on Apple Inc. (NASDAQ:AAPL) with the five-year PEG ratio being 0.6. While we aren’t quite that optimistic we do think it is a good value at a trailing P/E of 11. Einhorn has been urging Apple Inc. (NASDAQ:AAPL)’s management to return more cash to shareholders, including potentially through issuing preferred stock. Read more about Einhorn’s proposal for Apple. Microsoft carries a forward P/E of 9, with earnings estimates expected to see a temporary bump as new versions of Windows and Office are released. Both of these companies were on our list of the most popular stocks among hedge funds in the third quarter of 2012 (see the full top ten list).
Health insurers. Einhorn and his team have been long health insurers for some time, and last quarter Greenlight counted two insurers among its ten largest long equity positions after adding shares of Aetna Inc. (NYSE:AET) and Cigna Corporation (NYSE:CI). Health insurers are generally trading at low earnings multiples, possibly as investors worry about federal regulation if health care cost increases do not slow. Aetna and Cigna are no exceptions as their trailing earnings multiples are 10 and 11 respectively. A recent acquisition has boosted Cigna’s revenue and earnings; Aetna’s sales saw a double-digit growth rate last quarter compared to the fourth quarter of 2011 but earnings were actually down. Analyst consensus for 2014 implies modest growth on the bottom line, resulting in P/Es in the 8-9 range.
Here’s a stock that Einhorn has been selling:
Selling Seagate. Seagate Technology PLC (NASDAQ:STX) had been one of Greenlight’s largest positions at the beginning of October but by the end of Q4 it had been trimmed to 8.4 million shares- roughly half of what it had been three months earlier. The $13 billion market cap hard disk drive and data storage company reported a 13% decline in net income in its most recent quarter compared to the same period in the previous fiscal year, despite rising revenue. 11% of the outstanding shares are held short, even at a forward earnings multiple of 6, as the market worries about a company which has such strong exposure to PC demand. Iridian Asset Management, managed by David Cohen and Harold Levy, had owned 4.3 million shares at the end of September after cutting its own stake in half in Q3 2012 (check out Iridian’s stock picks).
Einhorn may be taking profits on Seagate (it has outperformed the market over the last year, and has more than doubled in the last two years) and if anything we think it might be worth looking at as a potential value stock. We’re also interested in health insurance, though it’s worth comparing Cigna and Aetna to their peers particularly if one could be found that is generating organic earnings growth. Apple looks like a good value at 11 times trailing earnings- though, of course, it also looked like a good value at higher prices. Microsoft is a tougher call as there has been quite a bit of skepticism about the reception of Windows 8. It may be best to avoid taking any position until the company begins to report results.
Disclosure: I own no shares of any stocks mentioned in this article.