What Did This Hedge Fund Pair With its Apple Investment?

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It's no secret that Apple (NASDAQ: AAPL) is the No. 1 stock pick in the hedge fund industry. Let's take a look at one fund in particular that is bullish on the stock.

Phil Gross and Robert Atchinson founded Adage Capital in 2001. The Boston-based firm manages money for endowments and foundations, with a focus on large-cap stocks. In reviewing the firm's latest 13F, a filing with the SEC that reveals the majority of its publicly owned securities, we have outlined Adage's top five holdings.

Apple makes up over 3% of Adage’s 13F portfolio and was its No. 1 stock pick as of its last filing. Apple has one of the industry's top balance sheets with a debt ratio (debt/assets) of 0%, compared to Microsoft (10%) and Google (7%).

According to our analysis of the company's secret hedge fund, Apple had about $7 billion in cash, cash equivalents, and short-term marketable securities on its last 10-K. The rest of the company's cash hoard (about $114 billion) is held in a number of different asset classes, including about 40% in corporate securities and 17% in U.S. Treasuries. With an annual dividend payout (2% yield) expected to total a bit below $10 billion this fiscal year, Apple does in fact have the capacity to boost shareholder wealth if it so desires.

Two of Apple's hottest products should continue to help the company generate large amounts of cash. The tech company's iPhone saw its US market share increase to 48.1%, surpassing Android's 46.7% for the 12-weeks ending Oct. 28, 2012, according to Kantar Worldwide. Meanwhile, the iPad represented 55% of all tablet shipments in 3Q 2012 according to ABI Research. Interestingly, billionaire Ken Fisher, founder of Fisher Asset Management, was upping his stake nearly 1,000% last quarter (check out Ken Fisher's new picks).

What company came in second?

Exxon Mobil (NYSE: XOM) has been Adage’s second largest 13F holding since Apple overtook it for the No. 1 spot during 1Q 2012. Exxon makes up 2% of the fund’s 13F assets after a 20% increase in shares during 3Q. Unlike key competitor Chevron, Exxon still plans to grow both its upstream and downstream businesses moving forward. Exxon pays a 2.6% dividend yield and is the largest publicly traded oil and gas company with a $400+ billion market value.

Its international presence, vast asset base and solid balance sheet makes it a stable long-term play. The oil and gas company has a beta of only 0.5 and over $13 billion in cash compared to $9 billion in long-term debt. From a valuation standpoint, Exxon's 9x P/E is well in line with other major oil/gas companies Chevron (9x) and BP (8x). Billionaire Bill Gates is Exxon's top fund owner of those we track with over 7.6 million shares (check out Bill Gates' top picks).

Philip Morris International (NYSE: PM), the international tobacco company, is Adage’s third largest 13F holding. Philip has a 3.9% dividend yield and is looking to embark on a $1 billion savings program. These savings should help counter generally declining cigarette consumption in developed countries. The company plans to drive its top-line with a greater focus on Asia, particularly India.

When compared to other major competitors on a sales valuation basis, Philip is the cheapest in the industry. The stock trades at 1.8x sales, cheaper than British American Tobacco (4.1x), Reynolds American (2.8x), Lorillard (2.2x) and Altria (2.6x).

According to its latest 13F filing, Adage Capital's fourth largest holding was in Kraft Foods, which split into Kraft Foods Group and Mondelez International on Oct. 1. Due to the fact that this occurred one day after the conclusion of the fund's latest filing period, and because it's such a material event, we won't speculate on just what became of Adage Capital's position. Check back at Insider Monkey for the next round of 13F filings to learn the details.

Who's the best of the rest?

General Electric (NYSE: GE), meanwhile, is Adage's next largest 13F holding. Wall Street analysts expect sales to only be up 4% in 2013, but longer-term growth is expected to be driven by increased spending in aerospace and energy infrastructure.  Another positive factor for the stock should be improving credit and lending markets. This will help lift its GE Capital segment (30% of FY2011 revenues), which partakes in consumer lending.

Compared to other diversified tech and products companies, GE trades relatively in line on a P/E basis at 16x, compared to 3M (15x) and United Technologies (15x). One bright spot for GE is its solid 3.5% dividend yield, which is well covered by some $85 billion in cash – annual dividend payout is around $8 billion. Billionaire George Soros is one of GE's biggest fans, upping his stake by 20% last quarter (check out George Soros' newest picks).

Honeywell International (NYSE: HON) came in as Adage’s next largest 13F holding, making up 1.3% of the firm’s 13F portfolio. Honeywell is another diversified tech and products company that trades a bit above the others at 23x earnings. This diversified products company also pays a less robust dividend than GE, yielding only 2.5%, but it also expects low sales growth in 2013 at 2%.

Honeywell has large exposure to aerospace (33% of 3Q 2012 revenues) that should benefit from a rebounding economy. Generally bullish trends in air travel should lead to higher fleet sizes and greater demand for fuel-efficient aircraft.

To recap: Adage has its top investments concentrated in the large-cap sector, but across a variety of industries that include tech, energy, tobacco and diversified products. Apple, being a top tech company, should continue growing with product innovation, while higher demand for oil and gas will help not only Exxon, but also GE. Philip Morris is one of the cheapest tobacco stocks out there and is a top player in its industry. Honeywell should be able to ride the broader economy higher with its exposure to safety solutions and aerospace.


This article is written by Marshall Hargrave and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Meena has long positions in AAPL and PM.The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, ExxonMobil, and General Electric Company. 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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