Hedge Funds Are Buying These Stocks
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13F filings provide the most complete picture of hedge fund portfolios, and they are certainly worth keeping track of, but they are limited in that they are only released once a quarter, and six to seven weeks after the end of the quarter at that. More up-to-date information comes in 13D and 13G filings, which are made when a fund or other major investor owns 5% or more of a stock’s shares outstanding. The catch is that these restrictions generally mean that filings are limited to small cap and mid cap stocks; however, these tend to be the exact stocks that are less well known and where it can be particularly useful for hedge funds to identify picks that are worthy of further research. Here are five stocks hedge funds have been buying recently.
Starboard Value, which is managed by Jeffrey Smith, increased its holdings of Regis Corp. (NYSE: RGS) to a total of 4.2 million shares. The operator and franchisor of hair salons had already been one of Starboard’s five largest holdings by market value at the beginning of October (find more of Starboard's favorite stocks). The fund now owns about 7% of the company’s outstanding shares.
Regis trades at 21 times forward earnings estimates, and in its most recent quarter revenue was actually down compared to the same period in the previous year; operating income was about flat. In addition, while Starboard appears optimistic, there is considerable short interest suggesting that a number of traders consider Regis overvalued. We don’t think that it’s a good buy.
Billionaire Ken Griffin’s Citadel Investment Group reported owning 5.4 million shares of homebuilder KB Home (NYSE: KBH). The company grew its revenue 19% in its last fiscal year (which ended in November) compared to the previous one; the bottom line also improved, though KB Home remained unprofitable. Given its losses, there would have to be continued improvement in the housing market for KB Home to look anything like a value stock and it might be better to consider peers such as Lennar Corp. (LEN) and D.R. Horton (DHI).
Oil and gas exploration and production company Penn Virginia Corp. (NYSE: PVA) was another stock Griffin and his team liked, as Citadel disclosed a large position there as well (check out more of Griffin's stock picks). The company’s production mix is about half natural gas (down from two-thirds a year ago) with the rest being oil and natural gas liquids. As a result revenue was only down 8% as rising oil prices partially offset cheaper natural gas. However, Wall Street analysts expect Penn Virginia to be unprofitable both this year and next and so we’d avoid it.
A 13D filed with the SEC has disclosed that Steelhead Partners, a hedge fund managed by Michael Johnston, owns 5.3 million shares of oil and gas exploration and production company Endeavour International Corp. (NYSE: END). The fund had initiated a position in Endeavour during the third quarter and owned a little over 4 million shares at the end of September; its most recent purchases have given it 12% of the shares outstanding.
Endeavour’s market cap of $240 million (an average of over 700,000 shares are traded daily) means that it is priced at 7 times consensus earnings for 2013. The company is unprofitable on a trailing basis, but revenue is up strongly and it’s worth seeing if its fields are just coming on line -- that would be a cheap price for a fast growing producer.
Two hedge funds -- Visium Asset Management and Baker Brothers Advisors -- reported large stakes in ACADIA Pharmaceuticals (NASDAQ: ACAD). The biotechnology company’s market capitalization is only about $260 million, but an average of over 3 million shares have been traded daily and the current market price is $4.50; this means over $10 million in daily dollar volume. The stock is up nearly 300% in the last year as it has been picking up sales, though as a development stage company it remains unprofitable.
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 owns shares of Regis. 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!