We track quarterly 13F filings from hundreds of hedge funds, including Ron Gutfleish’s Elm Ridge Capital. We have found that these filings can be useful sources of investment strategies (for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and we also think that it’s possible that investors might use them to identify interesting ideas for further research. Read on for our quick take on Elm Ridge’s five largest holdings from its most recent 13F (which discloses many of its long equity positions as of the end of March) or see the full list of the fund’s stock picks.
Elm Ridge reported a position of 3.9 million shares in MBIA Inc. (NYSE:MBI), a $2.6 billion market cap company which insures public finance securities and provides other structured finance services. Wall Street analyst consensus is for MBIA Inc. (NYSE:MBI) to earn 29 cents per share in 2014, which makes for a forward earnings multiple of 46 at current prices; according to the most recent data, 15% of the float is held short as many market players are bearish on the stock. We’d note that the stock price is highly correlated to the market with a beta of 2.0.
The fund also liked one of MBIA’s peers, Assured Guaranty Ltd. (NYSE:AGO). The sell-side is much more optimistic about this company relative to the market compared to MBIA; the stock trades at only 8 times forward earnings estimates (though we’d be reluctant to rely too heavily on analyst forecasts in either case). It also trades at a small discount to book value with a P/B ratio of 0.9. As with MBIA, Assured Guaranty Ltd. (NYSE:AGO) features a beta of 2.0 suggesting that the stock is highly dependent on market indices holding up.
Marketing and packaging company RR Donnelley & Sons Co (NYSE:RRD) was another of Elm Ridge’s top picks. The stock has paid quarterly dividends of 26 cents per share for roughly the last ten years, and at current prices that results in an annual yield of over 7%. However, recent reports have shown that lower margins are pulling down RR Donnelley & Sons Co (NYSE:RRD)’s earnings. Still, even if the company reduces its dividend somewhat it might still be a high yielder and at least going by analyst expectations the stock is decently priced with a forward P/E of 9.
Gutfleish and his team reduced their holdings of Boston Scientific Corporation (NYSE:BSX) during Q1, but still owned 4.9 million shares of the medical device company according to the 13F. Boston Scientific Corporation (NYSE:BSX) has been struggling recently, with revenue declining 6% in the first quarter of 2013 versus a year earlier and even adjusted trailing earnings numbers being relatively low compared to the company’s valuation. With the stock valued at 20 times consensus earnings for 2014 we would avoid it, even as an optimistic market has sent the stock price up over 60% in the last year.
In addition to Boston Scientific we’d also avoid MBIA, though we’d be interested in looking into why that company’s valuation diverges so strongly from that of Assured Guaranty. Income investors might be interested in taking a look at Lockheed Martin Corporation (NYSE:LMT) or R.R. Donnelley, though we’d warn that the former could see some short-term adjustments due to spending cuts and that the latter is a somewhat risky income stock as its dividend may be cut if weak performance continues.
Disclosure: I own no shares of any stocks mentioned in this article.
