Billion Dollar Hedge Fund’s Top Picks for 2013

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

At Insider Monkey, we track the smart money’s best and brightest managers—about 450 give or take a few. Based on our research, it’s important to monitor this group of hedge funds, and we’ve shown that historically, retail investors that pay attention to this world have beaten the market handily. We also recently teamed up with MarketWatch to create the Billionaire Hedge Fund Index. In 2012, this index returned 24.3%, beating the S&P 500 index by 8 percentage points (see the details of our market-beating strategy here).

While the most well known of this bunch include kahunas like David Einhorn, Warren Buffett or George Soros, there are also quite a few names flying under the mainstream media’s radar. One such hedgie is Andrew Sandler and his fund, Sandler Capital Management. According to his latest fourth quarter 13F filing with the SEC, Sandler has an equity portfolio in excess of $1 billion. Let’s take a look at how he was positioning his fund for 2013 by briefly analyzing his top five stock picks.

FEI Company (NASDAQ: FEIC) was Sandler’s 31st largest equity holding at the end of the third quarter, and he upped his position by more than 200% in Q4. This bet, combined with the fact that FEI shares gained 6.8% from the beginning of the second week of October through the end of December, indicates that Sandler’s conviction has paid off. Year-to-date, FEI has already popped another 14.3%, and mid-single-digit upside is still projected from current levels, at least according to the average Wall Street analyst’s price target.

The broad appeal of FEI’s nanoscale imaging instruments, including for usage in corporate, academic and research environments, is the key bullish thesis behind this stock, and the sell-side is expecting annual EPS growth of 16-17% over the next half-decade. At a PEG of 1.36, shares aren’t particularly expensive at the moment, and according to this metric, they’re actually cheaper than 39 of the 50 other companies operating in the scientific & technical instruments industry.

Verisk Analytics (NASDAQ: VRSK) and Generac Holdings (NYSE: GNRC), meanwhile, sit at No.’s 2 and 3 in Sandler’s equity portfolio, up from their third quarter positions of 18th and 26th. Both companies are up at least 4.5% since the start of 2013 and have gained more than 30% over the past twelve months. Verisk, a risk management information company, and Generac, a power generator manufacturer, obviously operate in vastly different sub-industries, but each is a solid value play in a fairly stable macroeconomic environment.

Verisk and Generac each sport price-to-earnings metrics that are at least 20% below peer norms, and each has experienced top and bottom line beats in at least four of the past five quarters. Verisk is expected to continue to benefit from its stable, loyal client base, and Generac controls nearly three-fourths of the residential standby generator market.

In short, both have key long-term advantages that don’t look like they’ll end any time soon, and legendary billionaires Jim Simons (see his favorite stocks) and Israel Englander hold both of these companies in their portfolios. That’s some great company for Andrew Sandler to have, obviously, and ardent investors should pay attention to this stable, undervalued duo.

Helmerich & Payne (NYSE: HP) was a new position for Sandler last quarter, and it’s notable that the oilwell drilling contractor has taken a spot so near to the hedge fund manager’s heart. For long-term investors buying into Helmerich between 2011 and the beginning of 2012, there hasn’t been much of a reason to be bullish—shares have yielded mid-single-digit returns with a relatively paltry dividend.

Since the start of 2013, however, Helmerich has popped more than 17%, rewarding those investing more recently, such as Sandler. Record Q1 results reported last month have supported this stock quite nicely, and a continued natural gas rebound should only fan the flames of this proverbial fire. In addition to Sandler ‘s bullishness, Wall Street expects 9-10% upside from current levels, and even that may be conservative.

Last but certainly not least, Tanger Factory Outlet Centers (NYSE: SKT) rounds out Sandler and his fund’s top five and saw a 22% boost last quarter. Tanger is a REIT, and as its name suggests, it focuses on factory outlet properties. Despite a dividend yield (2.4%) that places it at 27th out of 34 companies operating in the retail REIT industry, it has returned more than 20% over the past year.

Driving investors into Tanger seems to be its ability to provide solid growth—not value—as analysts predict its annual EPS growth over the next five years to outperform 80% of its peer group. All in all, growth of about 8% a year is expected, and although shares trade at relatively unattractive price multiples, it’s difficult to bet against Tanger’s momentum in a generally bullish industry.

Due to the potential to see returns like this, it’s always important to watch the smart money, and Andrew Sandler’s top five picks are a great example of why we track this space. Each has returned an average of 9.2% since the start of 2013, outperforming the SPY by nearly three percentage points.


This article is written by Jake Mann and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends FEI. 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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