In May, Bridgewater Associates- one of the largest hedge funds in the world, managed by billionaire Ray Dalio- filed its 13F for the first quarter of 2013. Even though the information in 13Fs is a bit old, we believe that there are still ways for investors to make use of it. For one, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year and think that other strategies are possible as well. We also like to screen picks from top managers according to a number of criteria, including the traditional value metric of low price-to-earnings multiples, allowing investors to do more research on stocks which interest them (as any stock screen works). Read on for our quick take on Bridgewater’s five largest positions as of the end of March in stocks with both trailing and forward P/Es of 13 or lower, or see the full list of the fund’s stock picks.
Dalio and his team increased their stake in Intel Corporation (NASDAQ:INTC) by 38% between January and March, to a total of over 1 million shares. In the first quarter of 2013, Intel Corporation (NASDAQ:INTC)’s revenue fell slightly versus a year earlier contributing to a 25% decline in net income. Wall Street analysts expect business to stabilize- and, as a result, both the trailing and forward earnings multiples are 12- but we are skeptical. Fisher Asset Management, managed by billionaire Ken Fisher, owned about 19 million shares according to its own 13F (find Fisher’s favorite stocks).
Bridgewater was buying Lockheed Martin Corporation (NYSE:LMT) during Q1, and entered April with about 220,000 shares in its portfolio. Aerospace and defense companies are at risk from potential cuts in federal spending, though to some degree this is already accounted for in Lockheed Martin Corporation (NYSE:LMT)’s valuation as it trades at only 12 times earnings- whether we consider trailing results or consensus forecasts for 2014. We’d also note that Lockheed Martin offers a dividend yield of 4.4% and tends to have a weak relationship with market indices at a beta of 0.6.
Another low-expectations, but potentially value, stock in the fund’s portfolio was Humana Inc (NYSE:HUM). Valued at 10 times trailing earnings- and with the sell-side not expecting much improvement on those numbers next year- Humana Inc (NYSE:HUM) achieved significant growth on the bottom line in its most recent quarter compared to the same period in the previous year though revenue was up only 3%. Many health insurers are carrying cheap valuations as investors worry about future regulation of their market, though at least in this case we’re at least somewhat intrigued by the combination of low growth but low multiples.
Bridgewater also liked UnitedHealth Group Inc. (NYSE:UNH), increasing the size of its position in that health insurer by 75%. Last quarter UnitedHealth Group Inc. (NYSE:UNH)’s revenue grew by 11% compared to the first quarter of 2012, but thanks to lower margins its earnings actually declined. Analysts expect that trend in net income to reverse, and so the stock features trailing and forward earnings multiples of 13 and 11 respectively. This places UnitedHealth at a small premium to Humana, though at least in revenue terms it has been achieving higher growth and it is a larger company by market cap.
Dalio disclosed ownership of a little less than 190,000 shares of Northrop Grumman Corporation (NYSE:NOC). While Northrop Grumman doesn’t look quite as attractive from an income perspective as Lockheed Martin, it does pay a 3% yield. It also meets the value criteria we’ve set out here, with a valuation of 11 times either its trailing earnings or forward estimates, though of course there would be concerns about how it would handle lower federal spending as well. So far Northrop Grumman Corporation (NYSE:NOC)’s business has been showing little change, going by recent reports.
From a long-term perspective we’re interested in aerospace and defense companies as potential value plays, and would be interested in learning more about the two we profiled here. The health insurers and Intel Corporation (NASDAQ:INTC) seem to have higher risk over the long term, as future policy could significantly impact the health insurance industry and the shift in consumer preferences which have been harming Intel Corporation (NASDAQ:INTC)’s business look set to continue. Still, we could see a diversified portfolio potentially taking advantage of low multiples, particularly on health insurers, with the hope that they would be able to deliver at least modest earnings growth in the future.
Disclosure: I own no shares of any stocks mentioned in this article.