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Pzena’s Biggest Q3 Moves: Hilton, Exxon, Seagate, More

Pzena Investment Management is a New York-based investment manager with over $25 billion in assets under management. The firm was founded in 1996 and pursues a deep-value, concentrated portfolio strategy that sometimes leads to volatile returns. Their investment approach is to buy good businesses at low prices, focusing exclusively on companies that are under performing their historically demonstrated earnings power. In its third quarterly newsletter, Pzena says that the valuation gap between the cheapest and most expensive stocks remains close to the levels seen during the Internet bubble of the late 1990s. When the stock market corrected in early 2000’s, old economy stocks proved resilient and their share prices went up sharply. In the current era of low interest rates and low economic growth, investors are shunning cyclical companies in favor of “safe stable earners” and “bond proxies”. The fund has high exposure to financials, old technology companies, cyclical as well as energy companies and does not own much in REITs, healthcare and utilities which it views as “bond proxies”. In the article below, we describe some of the biggest Q3 movers in Pzena’s portfolio.

At Insider Monkey, we track around 730 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

Richard Pzena - Pzena Investment Management

Seagate Technology PLC (NASDAQ:STX) is one of the largest manufacturers of hard disk drives (HDDs) in the world. The company is also diversifying into other electronic data storage solutions such as solid state hybrid drives and solid state drives. The stock has given a huge return of more than 81% in the last six months and its current market value is $9.7 billion. The company had initially given poor earnings guidance but then announced large jobs cuts to address the overcapacity in the market. Pzena Investment Management notes that though the overall PC industry shipments remain poor, the company’s enterprise business has performed extremely well. The fund has taken some profits after the stock price climbed steeply over the last couple of quarters. As per the fund’s latest 13F, it held 1.279 million shares in this company. Seagate Technology PLC (NASDAQ:STX) earned revenues of $2.7 billion in the last quarter with a net income of $167 million. While the number of funds holding this stock as per our records declined by 1 to 23 in the second quarter, the value of their holdings declined by almost 26% to $563 million by June end.

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Exxon Mobil Corporation (NYSE:XOM) is the one of the world’s largest oil and gas companies with a market capitalization of more than $350 billion. The company is engaged in the exploration and production of crude oil and natural gas, manufacturing of petroleum products, and transportation and sale of crude oil, natural gas and petroleum products. The stock is currently trading near the middle point of its 52 week price range. Analysts have a mixed view on the stock with 6 out of the 27 analysts rating it as a buy, while 8 analysts have rated it as a sell. Though Pzena Investment has trimmed the value of its Exxon Mobil Corporation (NYSE:XOM) holdings, it still remains one of the top 5 positions for the fund with 0.434 million shares. The fund thinks that the valuation of the stock remains on the higher side. The value of fund holding in this stock from our system increased to $3 billion by the second quarter end from $2.5 billion in the quarter earlier.

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Capital One Financial Corp. (NYSE:COF), which is the fourth largest credit card issuer in the USA, saw the value of its hedge fund holding increase by 6% quarter over quarter to $1.35 billion by June end. Pzena Investment initiated a position in this stock as it thinks that the credit card business is a good sector with a high return on capital and competitive discipline. For example, when the CARD act was implemented in 2010 to protect consumers, the whole industry responded with higher prices. Pzena Investment Management thinks that the company is attractive because it has lower underwriting costs than its peers and operates in a low competitive environment.  It bought 617,578 shares of this company during the last quarter as per its latest 13F filing. The fund thinks that the stock valuation is attractive at 7.5x of Pzena Investment’s estimated normalized earnings. The stock has given a return of more than 19% year to date and is trading near the top of its 52 week price range.

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Hilton Worldwide Holdings Inc. (NYSE:HLT) is the owner of the some of the most famous hotel brands in the world. The company operates in three segments: management and franchise, ownership and timeshare. Its brand portfolio includes Waldorf Astoria, Conrad, Hilton Grand Vacations, Hilton Garden Inn and DoubleTree by Hilton. Pzena Investment initiated a position in this stock as it believes that the company has a strong portfolio of brands and a robust pipeline of new builds. The fund held more than 1.28 million shares in this stock as of September 30th. The company is repositioning itself towards a franchise model through higher revenues per room, as compared to independent hotels. The fund likes the stock because it is increasing market share and is cheaply valued at 10x of normalized earnings. The number of hedge fund holding as per our records declined by 15 to 27 in the second quarter. However the value of their holdings increased to $1.95 billion from $1.49 billion in the earlier quarter.

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Baxter International Inc. (NYSE:BAX) is a medical equipment company with a market value of more than $25 billion. The company operates through two business divisions –  Hospital Products and Renal. The company reported revenues of $9.96 billion last year with net profits of $968 million. The company recently increased its earnings guidance to $1.88-$1.91 a share for 2016, compared with the prior outlook of $1.69-$1.74 a share. Out of the 18 analysts covering the stock, 14 have rated it as a hold. The stock has a dividend yield of 1% and 87% of its stock is held by institutional shareholders. Given the stock’s high valuation at ~20x forward P/E, Pzena Investment has reduced its holding of this stock. Approximately 17% of the company’s float as of June 30th was held by 52 hedge funds from our system.

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