Five Industry-Driven Bets This $13 Billion Hedge Fund is Banking On

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Billionaire Israel Englander founded Millennium Management in 1989 and prior to that, obtained his undergraduate degree from NYU. Englander later dropped out of his MBA program to trade on the AMEX and now manages roughly $13 billion in assets. His strategy utilizes a variety of trading strategies, with the bulk focused on industry-specific long/short positions. Englander’s emphasis is on fleeting anomalies in the financial markets, and he usually steers clear of directional bets. We believe that Englander was not necessarily looking at these five stocks for their intriguing dividend, but he did find a few industry-driven bets that pay solid dividend yields (check out Englander’s newest picks).

Abbott Laboratories (NYSE: ABT) is Englander’s 12th largest 13F holding and pays a 3.1% dividend yield. Abbott has plans to spin off its research and development segment in 2013, with the new company expected to generate nearly half of its sales from Humira. Sales for the remaining Abbott operations are expected to rise 5% in 2013 and the two separate companies are expected to see higher share prices due to multiples expansion, due to the ability to focus on central operations.

The dividend for Abbott post-spinoff is expected to be 56 cents annually, while the new R&D company will pay $1.60 per share annually. Compared to other top pharma companies, Abbott continues to trade on the cheap side at only 16x earnings, versus Pfizer (21x) and Merck (20x). Abbott and its major peers have been performing well over the past year as an aging population continues to boost drug demand. The stock was also a big-time play of billionaire Ken Griffin – founder of Citadel Investment Group – during the third quarter (see Ken Griffin’s top picks).

Valero Energy (NYSE: VLO) is an oil and gas company that makes up Englander’s 9th largest 13F holding and pays a 2.2% dividend yield. Valero’s refining segment is performing strongly this year, with its latest output averaging 2.7 million barrels per day, up 15% from the same quarter last year. The oil/gas company’s interim strength should come from strong distillate demand and increasing returns on CapEx spending – CapEx is expected to be $3.6 billion by the end of this year, up from $3.0 billion in 2011.

Part of what should drive Valero’s strength is a rise in oil prices on the back of increased demand for fossil fuels. Valero is also quite the value play, trading below the industry on a trailing P/E basis at 16x, at an even greater discount in terms of its forward P/E (6x). T. Boone Pickens had Valero as one of his latest stock picks (check out T. Boone Pickens' newest picks).

Target (NYSE: TGT) is the 18th largest holding in Englander’s 13F portfolio, and pays a 2.3% dividend yield. Same store sales for the retailer are expected to be strong in fiscal year 2013, as a 3-4% growth will be driven by a store-remodeling program aimed at providing customers with fresh foods. One other key initiatives for Target are its planned expansion into the Canadian market place.

Target trades in lockstep with its top competitor Wal-Mart on a P/E, P/S and a dividend yield basis. What sets Target apart is its long-term growth rate, which is 2 percentage points above Wal-Mart. Both retailers should see solid growth over the interim due to their breadth of consumer staple product offerings.

Englander increased his position in Metlife (NYSE: MET) by almost 60% last quarter, and is now the fund manager’s 25th largest 13F holding. This insurer also pays a 2.2% dividend yield. An improving labor market will help boost life insurance sales, though stronger presence in its international segment will be the key driver.

Metlife trades at a P/B of only 0.5x, and is valued in line with other major insurance peers on a P/E basis at 15x. We think Metlife’s PEG of 0.5 and long-term EPS growth rate of 12% are two factors that differentiate the company from its competitors; the latter should be helped by group sales in its life insurance division, as employment gains fuel demand.

Englander increased his stake of American Electric Power (NYSE: AEP) by over 1,000% last quarter. This utility company also pays the highest dividend yield of our five stocks mentioned with a yield of 4.3%. American Electric expects a decline in operating earnings this year, despite a winter that looks to be cooler than last year. Over the longer term, American Electric expects to see growth from competitive initiatives in its Ohio market segment.

American Electric trades at the low end of the industry at 13x earnings, and continues to show solid cash flow growth. The utility company pays an annual dividend that amounts to nearly $1 billion, and it was able to generate $1.2 billion in cash from operations last quarter alone.

To recap: we believe Israel Englander has made solid industry-specific bets that also provide downside protection with robust dividend yields. Abbott is one of the top performing pharma stocks in the industry and should manage to grow nicely following its spin off. Valero is a solid bet on the rebounding oil/gas industry that should see solid distillate demand going forward. Target, meanwhile, is a leading retailer that has managed to sport solid growth despite a weak economy, and its consumable food offerings give investors reason to be cheery. Metlife will be helped by a rise in general population over the long term, and American Electric is a niche utility company with growth opportunities in regional markets. 

This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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