Meet The Rare Fund That Was Buying Apple When Everyone Else Was Selling
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 get a bad rap. Most investors choose to think of the industry's 8,000-plus managers as one-size-fits all, but that's clearly not the case, even in the equity markets. At Insider Monkey, we've found that by focusing on the best stock picks of the best money managers, retail investors have historically found it possible to beat the market. Our small-cap strategy beat the market by 18 percentage points a year for more than a decade in our back tests, and since we started sharing this with the public, it managed to beat the market by another 20 percentage points in just 6 months (learn how to use this yourself).
It's equally as important to take a closer look at each individual fund within this "upper crust," so to speak. Our fund-by-fund analysis system is a great way to get started, and it's also important to look at each manager's favorite investments. We've already covered the latest picks from the many of the most well known names, but one that we haven't taken a look at yet is Joshua Friedman And Mitchell Julis's Canyon Capital Advisors.
Canyon Capital is an alternative asset manager that searches for risk-adjusted returns that outpace debt and equity market indices, with significantly lower volatility. Originally founded in 1990 in Los Angeles, the firm has offices in New York and London as well. Canyon Capital has close to $20 billion in assets under management and its flagship fund returned 10.4% a year between 2002 and 2011, versus the S&P 500's 3.3% return.
Worth a little over $708 million at the end of the fourth quarter, this fund's equity portfolio isn't gargantuan by any means, but it's big enough that we should pay attention to it. Let's take a look at Canyon Capital's top three stock picks, to determine how it was preparing for Mr. Market's ebbs and flows in 2013.
Cumulus Media (NASDAQ: CMLS) sits at the No. 1 spot in Canyon Capital's equity portfolio, as it has for three consecutive quarters. This bullish bet represents an interesting play for the asset manager, as just 13 of the funds we track were long at the end of Q4. That's a decrease of 7% from the previous quarter. Still, shares of Cumulus have already popped 20.6% since the start of the year, and Wall Street's average price target represents an upside of another 30%.
Clearly, what's driving this stock isn't just value investors--Cumulus does trade at 0.53 times sales--as analysts expect EPS to grow by more than 80% next year. That's quite the forecast, and it's worth noting that Cumulus has seen this story before over the past half-decade, averaging EPS growth of 68.5% annually. It's easy to see why Canyon Capital is optimistic on this small-cap media company.
Apple (NASDAQ: AAPL), meanwhile, is a very intriguing play here at the No. 2 spot. Why? Because Canyon Capital established a new position in the tech giant last quarter. If you'll recall, some of the hedge fund industry's biggest names--billionaire Dan Loeb for one--were selling off their stakes in Apple entirely last quarter. The stock was even tops on our list of "5 Stocks Hedge Funds Were Dumping Last Quarter," with 24 of the 450 funds we track cutting their positions in favor of other investments.
What would possess Canyon Capital to go against the grain of one of the most widely covered sell-offs in recent memory? Well, for starter's, Apple is a very solid value play with underrated growth prospects. Yes, Apple's EPS growth, which averaged 62.2% per year over the past half-decade, is expected to fall by more than two-thirds over the next few years.
But, and this is a big but, it's crucial to point out that this new predicted trajectory--19% annual EPS growth through 2017--trumps the likes of Google (NASDAQ: GOOG)'s 14.3% and Microsoft (NASDAQ: MSFT)'s 8.4% handily. Equally as important, Apple also trades at a mere PEG of 0.53, while Google (1.7) and Microsoft (1.8) are far more expensive.
What does this mean?
While most claim that more appeal to income investors is what's needed at the moment, there's still a ridiculously attractive value and growth play here, which is likely what Canyon Capital is banking on.
Belo Corp. (NYSE: BLC), lastly, rounds out this top three, where it's been for two consecutive quarters. Like Cumulus, Belo wasn't a particularly well loved stock last quarter, with only 17 of the funds we track invested. The crux of this television company's bullish thesis is that its 20 commercial broadcasting stations and two regional cable news outlets can drive stellar growth over the next couple years. Analysts forecast 72.6% EPS growth this year and 30.8% growth next year, and shares still trade at a mere 8.5 times forward earnings. That's 'growth at a reasonable price' in its purest form, and a dividend yield of 3.70% is icing on the cake.
This article is written by Jake Mann and edited by Meena Krishnamsetty. Meena has long positions in AAPL, GOOG, and MSFT. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and 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!