Several weeks after the end of each quarter, hedge funds such as billionaire James Dinan’s York Capital Management file 13Fs with the SEC to disclose many of their long equity positions as of the end of that quarter. Even though the information in 13Fs may well be out of date by the time it is released, we’ve actually found that it can be used to develop investment strategies; for example, the most popular small cap stocks among hedge funds tend to outperform the S&P 500 by an average of 18 percentage points per year. We also like to look for initial investment ideas among top managers’ new stock picks, doing further research on any interesting names. Read on for our thoughts on five of York’s largest new holdings as of the end of March and compare these picks to previous filings.
Dinan and his team bought 4.9 million shares of Virgin Media Inc. (NASDAQ:VMED), making the stock one of their five largest holdings by market value after not having owned any shares at the beginning of the year. Virgin Media Inc. (NASDAQ:VMED) is in the process of merging with Liberty Global; hedge funds often like to invest in the stock of acquisition targets since the returns on this investment depend on whether the deal closes rather than on changes in the company’s fundamentals, and so have little relationship to the broader economy. Funds can also use high leverage to magnify their returns.
Commercial real estate advisory and investment company CBRE Group Inc (NYSE:CBG) was another of York’s new stock picks with the filing disclosing ownership of 6.3 million shares. Given the sensitivity of commercial real estate demand to the overall economy, it’s not surprising that CBRE’s beta is high at 2.3. In the first quarter of 2013, the company experienced a 39% increase in earnings versus a year earlier, due primarily to higher margins but also helped by a 9% gain in revenue. Some future growth is already included in the stock price, however, at a trailing P/E of 23.
Another special situation making for a new pick in the fund’s portfolio is the impending breakup of News Corp (NASDAQ:NWSA); Dinan initiated a position of over 5 million shares during Q1. A number of funds, including billionaire Stephen Mandel’s Lone Pine Capital, were buying News Corp (NASDAQ:NWSA) between January and March (check out Mandel’s stock picks). In theory, the breakup of the company will act similarly to a spinout opportunity, with management of the sibling companies better able to improve operations and therefore create more value for shareholders.