In mid May, Capital Growth Management, a fund managed by Ken Heebner, filed its 13F with the SEC. These filings disclose many of a fund’s long equity positions as of the end of the previous quarter, and we’ve found that this information can be useful in developing investment strategies (for example, we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). 13F filings can also be used as a source of initial investment ideas from top managers, with investors performing further research on stocks which seem to be good values. We have gone through Capital Growth Management’s most recent 13F and here are its five largest holdings as of the end of March (or compare these picks to the fund’s previous filings).
Heebner reduced his holdings of Citigroup Inc (NYSE:C) by 14% but the bank was still his largest holding by market value at 5.6 million shares. Citigroup Inc (NYSE:C)’s stock price has roughly doubled in the last year, though that has also been accompanied by a rise in book value; as a result, while its discount to book has shrunk we still see a P/B ratio of 0.8. With earnings up, and with analysts looking for that trend to continue, Citigroup Inc (NYSE:C) still has something of a value case going. According to our database of 13F filings, Citigroup Inc (NYSE:C) was the fourth most popular stock among hedge funds in the first quarter of 2013 (find more of hedge funds’ favorite stocks).
Another financial stock at the top of Heebner’s portfolio, with a position of nearly 11 million shares, was Morgan Stanley (NYSE:MS). Morgan Stanley (NYSE:MS) is more of a pure play investment bank, and highly exposed to the broader economy, with a beta of 2.3. While the business has been struggling recently, Wall Street analysts are forecasting $2.54 in earnings per share for 2014, making for a forward earnings multiple of 10; we’d note that there is a discount to book here as well. Billionaire Bruce Kovner’s Caxton Associates was buying Morgan Stanley (NYSE:MS) last quarter (see Caxton’s stock picks).
According to the filing, Capital Growth Management owned 1.8 million shares of Whirlpool Corporation (NYSE:WHR) at the beginning of April. Whirlpool Corporation (NYSE:WHR)’s stock price has more than doubled in the last year, as the manufacturer of laundry and kitchen appliances has been a somewhat common way to play a housing recovery. The stock carries trailing and forward P/Es of 18 and 11, respectively- reflecting high expectations from the Street- and the five-year PEG ratio is only 0.5. Citadel Investment Group, managed by billionaire Ken Griffin, cut its stake during Q1 but still had over 1 million shares in its portfolio (check out more stocks Griffin owns).
$7.8 billion market cap homebuilder Lennar Corporation (NYSE:LEN) was another of Heebner’s top picks with the filing disclosing ownership of 4.9 million shares. Revenue was up by over 30% in Lennar Corporation (NYSE:LEN)’s most recent quarter compared to the same period in the previous fiscal year. We’d note that Lennar Corporation (NYSE:LEN) is a popular short, with the most recent data showing that short sellers are responsible for 23% of the float, and of course it is quite dependent on the housing market itself. Billionaire Stanley Druckenmiller reported a position of 2.8 million shares at the end of the first quarter of 2013 (research more stocks Druckenmiller likes).
Capital Growth Management apparently likes housing: its fifth largest holding by market value was another homebuilder, D.R. Horton, Inc. (NYSE:DHI). Revenue and earnings have also been surging at D.R. Horton, Inc. (NYSE:DHI), and the forward P/E of 14 is low enough that we think the company is worth a look- while growth rates will come down- analysts seem to actually be looking for a decline in earnings- it’s still a potential value play if housing continues to perform well. Of course, investors should be sure that their portfolio is not too concentrated on the housing market.
Disclosure: I own no shares of any stocks mentioned in this article.