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Francis Chou – Chou Associates Management

Francis Chou, a well-known value investor, who was named Morningstar Fund Manager of the Decade in 2004, founded Chou Associates Management in 1986. Because of perceptive stock picking, the fund has since grown to have an equity portfolio of $291.2 million, as of September 30. Performance has been solid, with Chou Associates Fund Series A units sporting an average annualized compound return of 11.2% since inception. Without further ado, let’s take a closer look at Chou’s top picks, which include Citigroup Inc (NYSE:C), Resolute Forest Products Inc (NYSE:RFP), Nokia Corporation (ADR) (NYSE:NOK)Sears Holdings Corp (NASDAQ:SHLD) , and Berkshire Hathaway Inc. (NYSE:BRK.A).

Francis Chou Chou Associates Management

But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 36 month period beginning from September 2012 (see more details here).

Francis Chou - Chou Associates Management
Francis Chou - Chou Associates Management
Chou Associates Management

#5 Sears Holdings Corp (NASDAQ:SHLD)

Shares held (as of September 30): 896,088
Total Value (as of September 30): $20.26 million
Percent of Portfolio (as of September 30): 6.96%

With the unemployment rate dropping to 5% and wage growth beginning to perk up, the U.S. economy is red hot right now. Given the better economy, department store chain Sears Holdings Corp (NASDAQ:SHLD) should benefit, but shares haven’t done very well year-to-date, losing 28.65%. Because of competition, Sears and Kmart comparable-store sales continue to decline and the company continues to burn through cash. The bulls hope Eddie Lampert can turn the company around. Bruce Berkowitz’s Fairholme (Fairx) was long 6.42 million shares at the end of June.

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#4 Citigroup Inc (NYSE:C)

Shares held (as of September 30): 410,000
Total Value (as of September 30): $20.35 million
Percent of Portfolio (as of September 30): 6.99%

After falling to $48 per share in late-September from $60 in mid-July, shares of Citigroup Inc (NYSE:C) have rallied to around $56 on the back of a great unemployment report and optimism that the Federal Reserve will raise interest rates by the end of the year. If the Federal Reserve raises the rates, Citigroup will realize a wider net interest margin and earn more profits, which it can use to buy back stock and pay a higher dividend. Lower unemployment will also increase more lending and reduce Citigroup’s write-offs. Seth Klarman’s Baupost Group and Dan Loeb’s Third Point were among the 126 hedge funds long the stock at the end of June.

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