Ken Heebner's Top Stock Picks

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In February many hedge funds filed their 13Fs for the fourth quarter of 2012. It’s possible to use these filings to develop investment strategies, helping investors earn profits. For example, we have found that the most popular small cap stocks among hedge funds have, on average, produced an excess return of 18 percentage points per year (read more about popular small cap stocks). 13Fs are more commonly treated as a list of recommendations from a top investor; similar to a stock screen, they spit out a few names that can be researched further if a quick look makes them seem appealing. We have gone through the 13F from Ken Heebner’s Capital Growth Management. Here are the five largest positions by market value that the fund owned at the end of December (see the rest of Heebner's stock picks):

The largest holding reported in the 13F was 6.5 million shares of Citigroup (NYSE: C). Citi has climbed 24% in the last year, beating the market, but the bank still trades at a sizable discount to book value with a P/B ratio of 0.7. Large banks have generally been doing well, and Citigroup is no exception with revenue and earnings rising in the fourth quarter of 2012 versus a year earlier.

Analysts expect good times to continue, and as a result the stock’s forward earnings multiple is 8 and the five-year PEG ratio is 0.8. We think investors could consider Citi, though other banks might be better buys. Citigroup was one of the five most popular stocks among hedge funds at the end of December (see more of the most popular stocks).

Investment bank Morgan Stanley (NYSE: MS) was another of Heebner’s favorite stocks. Morgan Stanley, like Citi, carries very optimistic expectations from the Street: consensus for 2014 implies a forward P/E of 8, and looking out further the PEG ratio is 0.6. While the bank did report revenue growth of more than 20% in its most recent quarter compared to the same period in the previous year, the bottom line has been more of a challenge. There could be a value case for Morgan Stanley but we think there are sufficient opportunities elsewhere in financials where performance has been more dependable.

Capital Growth Management increased its stake in Lennar (NYSE: LEN) by 19% to a total of 4.9 million shares. The homebuilder has soared 63% in the last year as the housing market has turned up; sales have been up 42% contributing to a very high earnings growth rate. Consensus for the fiscal year ending in November 2014 currently implies a forward P/E of 17. Similarly to large banks, we think that investors should be watching housing related stocks, but wouldn’t be sure that Lennar is the best way to play a housing thesis.

Whirlpool (NYSE: WHR) is up 46% in the last year -- possibly on similar bullishness regarding housing -- and Heebner and his team were buying the appliance manufacturer as well in the fourth quarter. However, results were actually poor in that quarter as revenue fell and margins contracted.

Wall Street analysts believe that Whirlpool will recover, and its market capitalization of $8.7 billion places it at 10 times forward earnings estimates. Given the decline in business we think that we would avoid the stock for now.

The fund increased its holdings of PulteGroup (NYSE: PHM), another homebuilder, by 24% to 8.9 million shares. The stock carries a beta of 2.2, demonstrating how sensitive it is to the broader economy. The forward earnings multiple here is 14, which would make PulteGroup a decent value if it was able to hit its earnings targets while maintaining its growth prospects. Of course we wouldn’t put too much faith in analyst projections and certainly we would want to examine PulteGroup’s peers -- including Lennar -- in more detail before recommending one or another.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has long positions in C and MS. The Motley Fool owns shares of Citigroup. 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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