How This Multi-Billion Dollar Hedge Fund Was Preparing 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.

Hedge funds often get a bad rap, but the smart money still has plenty of investing chops if you know where to look. At Insider Monkey, we’ve found that historically, the best stock picks of the best fund managers can beat the market, and quite handily at that. For more than a decade, our small-cap strategy generated an outperformance of 18% a year, and since we started sharing these picks with the public last fall, it has outperformed the S&P 500 index by a whopping 22.5% in only 5.5 months.

The point is this: Take advantage of the investing world’s ignorance, and pay attention to hedge fund sentiment. Here’s how to use these dominant strategies for yourself.

With that in mind, we’re going to take a detailed look at one fund that has flown under the radar of the mainstream media: John Overdeck and David Siegel’s Two Sigma Advisors (see their full equity portfolio). This duo has a relatively large multi-billion dollar equity portfolio to their name and invests in a range of stocks from healthcare to technology. Let’s take a look at what Overdeck and Siegel’s top five stock picks were in the fourth quarter to see how they have prepared for 2013.

ConocoPhillips (NYSE: COP) represents the largest position in this hedge fund’s equity portfolio after Overdeck and Siegel upped their stake by 330% last quarter. Of the 35 managers who were long Conoco in both Q3 and Q4, this increase represents the largest of the bunch, more than Ken Griffin (+162%) and Jason Adler’s (+106%) moves. That’s quite the bet considering that Conoco’s stock price only appreciated by 1.4% in the fourth quarter.

Since the start of 2013, shares have returned just 0.3%, but it’s worth noting that Wall Street’s average price target is 6-7% higher than current levels. At a mere 9.4 times forward earnings and 1.5 times book, Conoco isn’t particularly expensive, and combined with the fact that its dividend yield is a whopping 4.5%—higher than peers like Exxon and Encana—it's easy to see why Overdeck and Siegel are so bullish.

SBA Communications (NASDAQ: SBAC), meanwhile, is the duo’s No. 2 stock pick, and has been for two consecutive quarters. There’s not a ton of interest in SBA from many of the hedge fund’s peers, but Stanley Druckenmiller and Jim Simons (see Simons’s full profile) are a couple of the top-tier managers who are long. The company, which owns and operates wireless communications towers, has been a splendid investment over the past year, returning over 50%. As is the case with most of its peers, SBA should continue to benefit from 4G LTE rollout—particularly in rural areas—and analysts’ average target represents a 15% upside. This is a momentum play, pure and simple.

Microsoft (NASDAQ: MSFT) sits at third in Overdeck and Siegel’s portfolio, and the hedgies upped their stake by more than 300% last quarter. Generally speaking, this goes against the trend we’ve observed, where the smart money is moving capital out of top-tier tech players into discounted financial companies. Microsoft lost more than 10% of its value in Q4, and it has underperformed the technology sector year-to-date. Still, investors who believe that the Surface Pro, Windows 8 OS, and the new Xbox can drive future growth are now able to snatch up Microsoft at a solid price. Shares trade at a mere 8.8 times forward earnings, and a dividend yield of 3.3% acts as the bulls’ proverbial cherry on top.

Next up we have Occidental Petroleum (NYSE: OXY), which saw Overdeck and Siegel up their stake by more than 2,500% last quarter. Of the 450 hedge funds we track, 48 have joined this duo in Occidental, including T. Boone Pickens, Dmitry Balyasny and Ray Dalio. The key bullish thesis behind this integrated oil and gas giant is its ability to grow production at a quicker rate than many of its larger peers. The sell-side forecasts EPS expansion of 45% this year alone—the fourth highest rate in its industry. Occidental has already returned 9.1% since the start of 2013, and the Street’s average price target is 19-20% higher than its current trading price near the $83 mark.

Vodafone Group (NASDAQ: VOD) rounds out this top five after Two Sigma upped its stake by more than sixty­fold last quarter. Like Microsoft, this stock dropped by double-digit percentage points in Q4, likely prompting Overdeck and Siegel to buy on the dip. Vodafone has been criticized for its 4G-deployment lag in the past, but it has recently purchased a boatload of spectrum in the UK, indicating that slow and steady may actually win this race (or at least be kinder to investors’ portfolios).

At a lowly 1.1 times book and a dividend yield of 4.1%, there are plenty of reasons to be optimistic about Vodafone at the moment, and key hedgies like Paul Tudor Jones and Israel Englander were also bullish last quarter. With results like these, it’s difficult to conceive why retail investors would not pay attention to the smart money. 

This article is written by Jake Mann and edited by Meena Krishnamsetty. Meena has long positions in COP, MSFT, and VOD. The Motley Fool recommends Vodafone. The Motley Fool owns shares of Microsoft. 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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