For investors who follow hedge funds, the most complete picture of hedge fund activity comes in the form of 13F filings, generally released six to seven weeks after the end of the quarter (meaning that those for December 2012 which have not already been released are due next week). 13Fs can be used to see what an individual fund manager is thinking, or can be pooled to develop investment strategies; for example, our list of the most popular small cap stocks among hedge funds that we published in our August newsletter produced an excess return of 18 percentage points between September and January (read more about our hedge fund strategies).
Hedge funds and other major investors also file 13Ds and 13Gs shortly after they take a 5% ownership stake in a company, or shortly after they make significant changes to that position. This provides investors with more up-to-date, though much less comprehensive, information on hedge fund activity. Recently Marcato Capital Management, a fund managed by Richard McGuire, reported owning just over 5 million shares of Lear Corporation (NYSE:LEA), a $5.2 billion market cap auto parts manufacturer. Specifically, Lear focuses on seat systems and electrical distribution components. Our records show that Marcato, which now owns 5.2% of Lear, had not owned any shares at the end of September (see Marcato’s stock picks from its 13F). McGuire had previously worked at billionaire activist investor Bill Ackman’s Pershing Square.
Lear Corporation’s revenues were up 6% last quarter compared to the fourth quarter of 2012, and pretax income roughly doubled primarily due to higher gross margins. While the trailing earnings multiple is skewed by high income tax benefits, analyst consensus for 2013 is for $4.81 in earnings per share which produces a fairly low current-year P/E of 11. Estimates for 2013 place the forward earnings multiple at 9.
Auto related companies, including auto parts manufacturers, have been popular with many hedge funds seeking value; General Motors Company (NYSE:GM) had actually been one of the most popular stocks among hedge funds in Q3. Lear Corporation is no exception. During the third quarter billionaire Ken Griffin’s Citadel Investment Group increased its stake in the company by 36% to a total of 1.8 million shares (check out more stocks Citadel was buying). Fellow billionaire Steve Cohen’s SAC Capital Advisors was also buying shares and reported owning 1.1 million shares at the end of September (find Cohen’s favorite stocks). Valinor Management, managed by David Gallo, was the largest holder of the stock in our database of 13F filings with a position of 2.7 million shares (research more stocks Valinor liked).
Lear seems to be at least as good a value as its peers:
Peers for Lear include Johnson Controls, Inc. (NYSE:JCI), Delphi Automotive PLC (NYSE:DLPH), and Magna International Inc. (NYSE:MGA). Forward earnings multiples for these companies tend to be in the 9-10 range, even with where Lear trades. Johnson and Delphi each reported double-digit percentage declines in net income in their most recent quarter compared to the same period in 2011, with Delphi’s earnings in particular being down sharply. Lear might therefore be considered a safer investment than these two companies. In the third quarter of 2012 Magna experienced similar circumstances to what Lear has reported: a moderate increase in sales, and an abnormally high growth rate of net income. It may be worth further research to see if its improved bottom line is more sustainable.
We’d consider Lear’s results for Q4 to be very strong news, even though the growth rate of pretax income should slow as long as revenue numbers are only modestly higher. Certainly the valuation is attractive at 11 times earnings estimates for this year. Of course auto related companies are generally cheap and it may be worth evaluating the automakers (such as GM and its competitors as well as Lear should depend on a stable auto market to continue its current sales growth.
Disclosure: I own no shares of any stocks mentioned in this article.
