13F filings from hedge funds and other notable investors are several weeks old by the time they are filed, but there are still a couple ways to put the included information to work. The most popular small cap stocks among hedge funds tend to produce an excess of return of 18 percentage points per year, on average (read more about imitating hedge funds’ small cap picks); other strategies are likely possible as well. We can also review filings from top investors and use their stock picks as suggestions for further research, and potential buys if that research justifies taking a position in the stock.
SAC Capital Advisors, managed by billionaire Steve Cohen, and some former employees of the firm have been investigated for insider trading violations but that has not distracted Cohen and his investment team from the markets. SAC recently filed its 13F and here are some themes we noticed in the fund’s investment activities compared to previous filings:
Dotcoms. SAC was buying shares of eBay Inc (NASDAQ:EBAY) and Facebook Inc (NASDAQ:FB), and these are now two of the four largest positions reported on the 13F. The fund increased its stake in eBay to 4.6 million shares (from 2.5 million shares three months earlier), and reported a position of 8.5 million shares in Facebook Inc (NASDAQ:FB) after owning a small number of shares at the beginning of October. Both of these companies are priced for growth: eBay trades at 29 times trailing earnings while Facebook Inc (NASDAQ:FB) carries a forward earnings multiple of 36. While Facebook has certainly produced significant revenue growth- up 40% last quarter compared to the fourth quarter of 2011- earnings growth rates have lagged due to higher costs. Tiger Global Management also has a large position in Facebook (find Tiger Global’s favorite stocks). eBay, whose growing payments business includes PayPal, actually experienced a decline in net income in the fourth quarter versus a year earlier but revenue growth remained strong and analysts are generally bullish on the company.
Sherwin Williams. Sherwin-Williams Company (NYSE:SHW) is Cohen’s new top stock pick, with SAC reporting a position of 1.6 million shares. The $17 billion market cap paint and coatings company’s stock price is up 63% in the last year. The stock now carries trailing and forward P/E multiples of 26 and 18, respectively, so it will have to continue to record strong growth in order to justify its current valuation. Sales increased 7% in its most recent quarter compared to the same period in the previous year, and even with margins generally strong we would like to see better performance in evaluating it as a growth stock. Billionaire Richard Chilton’s Chilton Investment Company owned about 680,000 shares of Sherwin-Williams at the end of the third quarter of 2012 (see Chilton’s stock picks).
Find some examples of stocks that the hedge fund was selling last quarter:
High turnover. Of course, for these stocks to rise to the top of SAC’s portfolio some other stocks had to fall. Our analysis shows that the fund cut its stake in Sirius XM almost in half, and sold nearly 3 million shares of AIG as well. It also sold nearly all of its shares of Gilead Sciences, Inc. (NASDAQ:GILD) and Tiffany & Co. (NYSE:TIF), which had been among its five largest holdings by market value at the end of September. The jeweler has been struggling recently, and with a trailing earnings multiple of 20 we can see why Cohen may have considered it a poor value. Gilead, a biopharmaceutical company with a market capitalization of $63 billion, has been another high flier over the last year- up 77%. While it has been reporting double-digit growth rates on both top and bottom lines, the trailing P/E is 25 here and so again SAC may have decided that the valuation is overestimating future growth rates.
While Gilead and Tiffany are not particularly attractive value stocks, we certainly don’t think that Facebook is either; the market seems to be assuming quite high earnings growth for a company which still seems to be casting for a monetization strategy. Sherwin-Williams and eBay aren’t cheap either, and while they have been experiencing good sales growth rates (and may be worth investigating further) we wouldn’t be particularly excited about them from a value perspective either.
Disclosure: I own no shares of any stocks mentioned in this article.