Hedge Fund North Run Capital’s Stock Picks for 2013

13F filings are made within several weeks after the end of a quarter and disclose many of the long equity positions held by a hedge fund or other major investor. One way that we use this information to benefit investors is by researching investment strategies derived from our database of filings. For example, the most popular small cap stocks among hedge funds tend to outperform the market; we published the list of these stocks in our August newsletter, with those names then producing an excess return of 18 percentage points between September and January (read more about our hedge fund strategies). Of course, even looking at a single 13F can provide free investment advice from hedge fund managers and an investor can research their stock picks in more detail if they sound intriguing. Read on for our thoughts on North Run Capital (a hedge fund managed by Thomas Ellis and Todd Hammer)’s five largest holdings as of the end of December 2012 and compare them to previous filings.

CIT Group Inc.

The fund’s top pick was CIT Group Inc. (NYSE:CIT) with a position of 1.6 million shares as well as a large number of call options. The $8.6 billion market cap commercial lender failed to turn a profit in 2012 but did report positive earnings in the fourth quarter of the year (when revenue was up 32% from a year earlier); analyst expectations imply a current-year P/E of 11. CIT is also valued at the book value of its equity. Oaktree Capital Management, managed by billionaire Howard Marks, owned 6.8 million shares of CIT at the end of September (find Oaktree’s favorite stocks).

North Run reported owning 1.7 million shares of Hospira, Inc. (NYSE:HSP), up from 1.1 million shares three months earlier. Hospira is a $5.7 billion market cap developer of injectable pharmaceutical products for a variety of purposes. It trades at 15 times consensus earnings for 2013, which seems to be an appropriate price or possibly a bit high for a company which reported very light sales growth in its most recent quarter compared to the same period in 2011. John Rogers’ Ariel Investments was a major holder of the stock in the third quarter of 2012.

The investment team also liked General Motors Company (NYSE:GM), adding shares of the auto manufacturer which was actually one of the ten most popular stocks among hedge funds in the third quarter (see the full top ten list). At a trailing P/E of 11, and with earnings actually down, GM doesn’t look like a value stock at first glance. However, a number of value investors have argued that the automaker is well positioned to capitalize on a recovery in the US and Europe. Among their arguments is that US consumers will have to replace their aging cars (the consumer auto fleet is abnormally old), creating demand.

Adobe Systems Incorporated (NASDAQ:ADBE) was another of North Run’s top picks. The stock looks pricy at 24 times trailing earnings; while net income was up over 20% in the fourth quarter of Adobe’s last fiscal year (which ended in November), revenue growth was much lower and we doubt that earnings can continue to rise at a similar rate on margins alone. In January we reported on an insider purchase at Adobe (learn more about the insider purchase and our thoughts on the company).

North Run initiated a position of 1.1 million shares in Aetna Inc. (NYSE:AET) during the fourth quarter of 2012. High health care costs outpaced growth in Aetna’s premium revenue over the course of 2012, resulting in the company reporting a sharp decline in earnings in Q4 from its levels in the fourth quarter of 2011 despite higher revenue. The trailing and forward P/Es are 11 and 9, respectively. Coincidentally, Aetna also recently had an insider buy in; when we looked at the company we concluded that its peers in the health insurance industry might actually be better buys (find out which stocks we liked better).

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