13F filings, which disclose many of the long equity positions in U.S. stocks owned by a hedge fund or other major investors, are published six to seven weeks after the end of each quarter. It’s commonly thought that this lag makes them not very useful, but our judgment is that it is possible to develop profitable investing strategies based on the included information. For example, the most popular small cap stocks among hedge funds generate an excess return of 18 percentage points per year (learn more about our small cap strategy). We also like to report on top picks from billionaires and hedge fund managers so that investors can do more research on any interesting stocks. Here are our thoughts on the five largest holdings by market value that billionaire James Dinan’s York Capital reported on its 13F (compare these picks to York’s previous filings):
The fund’s top pick was American International Group, Inc. (NYSE:AIG), reporting a position of 8.8 million shares. AIG became the most popular stock among hedge funds, surpassing Apple Inc. (NASDAQ:AAPL); Dinan actually increased his stake in Apple by 61% during the quarter, though it was not one of his five largest holdings by market value. Find more of hedge funds’ favorite stocks. We think that AIG’s popularity in the hedge fund community stems from its low price relative to book value (the P/B ratio is only 0.6); while we wouldn’t value the insurer at book, a smaller discount is more appropriate in our view.
York initiated a position of almost 17 million shares in PetroLogistics LP (NYSE:PDH) during the fourth quarter of 2012. Petrologistics is a $2.1 billion market cap company which converts propane into propylene which is then used by chemical companies. The stock became publicly traded in May 2012 and is down 8% from its levels shortly after the IPO. Analyst consensus for 2013 implies a current-year P/E of 8; dividend payments have also been generous recently relative to the stock price, resulting in a high yield. Steadfast Capital Management, managed by Robert Pitts, owned 7.6 million shares at the beginning of 2013.
$6.4 billion market cap real estate brokerage owner, operator, and franchisor Realogy Holdings Corp (NYSE:RLGY) was another of Dinan’s top stock picks. Realogy’s brands include Century 21 and Coldwell Banker. Clearly the fund’s investment in Realogy is meant to play to a recovering real estate market, and the company’s revenue was up 30% last quarter compared to the fourth quarter of 2011. However, the earnings multiples are still high with the forward P/E (based on estimates for 2013) being 30. Billionaire John Paulson’s Paulson & Co. reported a position of over 13 million shares (see Paulson’s stock picks).
Find two more stocks York likes:
Dinan and his team cut their stake in Hertz Global Holdings, Inc. (NYSE:HTZ), which rents construction and industrial equipment in addition to its better-known rental car business, to a little under 12 million shares though it was still one of their top stock picks. At a beta of 2.7, Hertz is highly exposed to the broader economy. While it looks pricy in terms of its trailing earnings, Wall Street analysts are highly optimistic about the next several years. The stock trades at 10 times forward earnings estimates and a five-year PEG ratio of 0.4. Highbridge Capital Management was another major investor in Hertz; Steadfast is managed by billionaire Glenn Dubin (check out more stocks Highbridge owned).
Sprint Nextel Corporation (NYSE:S) rounded our York’s five largest holdings by market value. Sprint’s stock price has risen 130% in the last year due to a number of factors, including a pending large investment from Softbank. Given that the company is not expected to be profitable this year or next year, we really can’t evaluate it on a value basis but we have noticed increasing hedge fund interest in Sprint. Among the funds which have been buying Sprint is billionaire Leon Cooperman’s Omega Advisors (find more stocks Cooperman likes).
Disclosure: I own no shares of any stocks mentioned in this article.