Hedge Fund Blue Mountain Capital’s Top Stock Picks for 2013

Domtar Corp. (NYSE:UFS) as another of Blue Mountain’s investment team’s top stock picks as the fund owned about 580,000 shares, up from about 490,000 shares at the end of September. Gates Capital Management, managed by Jeffrey Gates, had owned slightly over 900,000 shares of the $2.8 billion market cap paper and personal products company at that time (check out Gates’s stock picks). Domtar’s industry is not particularly attractive- and, in the third quarter of 2012, its earnings dropped 44% on a small decline in revenue- but the valuation is at least cheap at 13 times trailing earnings. That isn’t quite cheap enough for us to get interested in a paper company, however.

The fund added shares of American International Group, Inc. (NYSE:AIG) to its portfolio as well, beginning the year with 1.3 million shares of the insurer in its portfolio. Blue Mountain had started buying AIG in the third quarter of 2012, when AIG won a place as one of the most popular stocks among hedge funds (see the full top ten list). AIG is currently valued at 0.6 times the book value of its equity, and while we can certainly see why it would be trading at a discount to book we think that the stock has a good deal of upside from its current levels- a P/B of 0.7 or 0.8 would seem more appropriate. AIG trades at 11 times consensus earnings for 2013.

Blue Mountain’s investment team slightly increased their holdings of Hanesbrands Inc. (NYSE:HBI),reporting that the fund now owns 1.2 million shares. The apparel company is something of a growth play: bottom-line growth has been very good but the stock carries trailing and forward P/Es of 30 and 11 respectively. This implies a steep improvement in earnings this year, something we would be careful of relying on, and so we likely wouldn’t buy the stock. Robert Bishop’s Impala Asset Management owned 1.6 million shares of Hanesbrands at the end of September (find Impala’s favorite stocks).

Disclosure: I own no shares of any stocks mentioned in this article.