Hedge funds are often managed by some of the most talented investment professionals with billions of dollars at their disposal. And with investment minimums that put them out of range for the average investor, their trading strategies and portfolio holdings are often hard to find and even harder to track. Fortunately, at Insider Monkey, we track 450 of the world’s most elite hedge fund managers and our research has shown that over time, their best picks have routinely outperformed, historically speaking. For more than a decade in our back tests, our strategy beat the market by 18 percentage points a year, and since we’ve started sharing these picks with the public, it has outpaced the S&P 500 by more than 20 percentage points in just six months (learn how to use this strategy yourself).
Let’s look at one of those hedge funds in particular: Ariel Investments managed by John W. Rogers (see his entire equity portfolio here).
On top lies First American Financial Corp (NYSE:FAF). It’s little surprise why First American takes the No. 1 spot. Everything about this company screams stability, from its core business (title and specialty insurance) to its price-to-earnings ratio of 8.9 versus an industry average of 13.7. Thanks to low mortgage rates and the subsequent need for title insurance, First American Financial Corp (NYSE:FAF)’s recent earnings report beat market expectations and nearly doubled bottom line totals from the same quarter last year. Rogers reduced his stake in the business by about 772,000 shares from the prior quarter, but it is still the most dominant stock in his portfolio.
Interpublic Group of Companies Inc (NYSE:IPG) is an advertising and marketing services company and is No. 2 on Ariel Investments’s list of equity holdings. The advertising conglomerate weathered a lackluster earnings report last month and continues to probe new year-over-year highs at $13.00. The stock is looking very strong into the end of the 1st quarter with a P/E ratio of 13.8 versus its industry’s average of 20.5, and looks to be a strong buy recommendation with an upside target of $14.25. Rogers upped his position in Interpublic Group of Companies Inc (NYSE:IPG) by 10% from the previous quarter.
At No. 3 is Lazard Ltd (NYSE:LAZ). The investment bank and financial services business had a favorable earnings report last month–$1.44 for year ended 12/31/12 versus $1.31 year ended 12/31/11. But because the stock seems overvalued at $37.00 to $37.55, it didn’t really get the boost it needed from the favorable news. Rogers cut his position in Lazard from the third quarter by only 2%, and analysts appear to be split between a BUY and HOLD recommendation….
…but when you consider how financial services stocks have been doing as a result of the recent gains in the Dow and NASDAQ, Lazard might be able to ride the wave along with the rest of the crowd and break the $37.55 mark.
Jones Lang LaSalle Inc (NYSE:JLL) is No. 4 on Ariel Investments’s list. Although the business calls itself a financial and professional services firm, it is more commonly known as a real-estate management and investment business with holdings across the globe. As investors look for higher yields than those currently offered in the U.S. bond market, they are dipping their toes (ever so conservatively, however) back in real-estate stocks. Because of Jones Lang’s global positioning, the stock is doing remarkably well, outperforming both the S&P 500 and DJIA, and has recently seen a great deal of insider buying activity. Analysts are recommending a buy in this stock with an upside of $101.60, with shares last around $99.80.
Last but not least is Gannett Co., Inc. (NYSE:GCI) at No. 5. Rogers sliced his position in the media giant by more than 15% from the second quarter of 2012, but this is clearly not reflective of the performance of Gannett since the start of the year. Better-than-expected earnings and the recent acquisition of 10Best.com has elevated this stock to a 3-year high of $21.59, and there seems to be further upside potential in respect of strong technical indicators along with analysts’ buy recommendation. Although revenue growth has become stagnant over the past several years, the stock is still priced cheaply to earnings and its book value.
Hedge funds’ favorite picks are always good to watch, and John W. Rogers’s “fab five” is no exception.
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