What Are Hedge Funds Buying Right Now?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

We follow hedge fund activity in 13D and 13G filings so that we can get the most up to date information on how hedge funds are buying large percentage stakes in publicly traded companies (unfortunately, this generally limits the companies in question to small and mid caps). These picks from hedge fund managers can be reviewed, and investors can decide whether or not to buy the stock as well if they do further research and become convinced that it’s a smart move. Here are five stocks that hedge funds have been buying recently.

Corvex Capital, which is managed by former Carl Icahn employee Keith Meister, added slightly to its position in ADT Corp (NYSE: ADT) and now owns 11.7 million shares or 5.1% of the total shares outstanding. ADT is a spinout from Tyco International and provides electronic security and monitoring systems for homes and businesses. Hedge funds often like to invest in spinouts because the management of the new company can focus more on their core operations without having to worry about being part of a larger business. At 22 times consensus earnings for the fiscal year ending in Sept. 2014, ADT would have to crush expectations to be a good buy at these prices. We think it’s best to avoid the stock.

Billionaire Ken Griffin’s Citadel Investment Group (see Griffin's stock picks) reported a position of 1.2 million shares in WhiteWave Foods (NYSE: WWAV), a substitute and organic dairy company which is itself a spinout of Dean Foods. As at ADT, the market appears to be counting on operations to improve considerably now that WhiteWave is independent. The forward P/E is 22 here as well. Given the company’s trendy product line, it’s not surprising that WhiteWave has been reporting good growth numbers. However, we think it’s worth waiting to see more results from WhiteWave as an independent company, particularly as a number of traders seem to have decided to short the stock.

That wasn’t all Griffin and his investment team were up to: They also reported buying shares of Fairchild Semiconductor International (NYSE: FCS), and the fund now owns 5.8 million shares after having had 3.3 million shares in its portfolio at the end of the third quarter. Fairchild’s revenue and net income fell at double-digit rates last quarter versus a year earlier, though the sell-side expects it to rebound next year. Even assuming that improvement, the stock trades at 19 times forward earnings estimates. It doesn’t seem like a good value.

GAMCO Investors filed a 13D to report a large position in Caribou Coffee Company (NASDAQ: CBOU). Caribou is an acquisition target, with holding company Benckiser offering to buy it out for a price of about $16 per share. GAMCO seems to have been buying at prices very close to that level, even for a merger arbitrage play, and the current stock price is actually above $16. Accretive Capital Partners, a major holder of the stock, has been pushing for a higher sale price, and apparently the market believes the company merits one.

Elliott Management, which is managed by billionaire Paul Singer, was getting a little acquisitive itself: The large hedge fund reported a position in Compuware Corporation (NASDAQ: CPWR) and has offered to acquire all the outstanding shares at $11 per share (check out more stocks Elliott has been buying). As at Caribou, there is speculation the company could be bought at a higher price, and we’d note that a strategic acquirer would generally be expected to pay a higher price than a financial buyer such as Elliott. However, Compuware also seems expensive at Elliott’s offer price, and investors might be limited to the modest return from the hedge fund closing the deal (assuming it does so).

This article is written by Matt Doiron and edited by Meena Krishnamsetty. 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!

blog comments powered by Disqus