Billionaire Bruce Kovner’s Cheap Stock Holdings

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Six to seven weeks after the end of each quarter, hedge funds file 13Fs with the SEC; these filings disclose many of their long equity positions as of the end of the last quarter. One way to use this information is to compile many funds’ portfolios and use the data to develop investment strategies; for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (read more about our research on small cap picks).

It’s also common for investors to use picks from top investors similarly to a stock screen, identifying names that can then be researched further, and we can combine ownership by a hedge fund with traditional value criteria. Here are billionaire Kovner’s Caxton Associates’ five largest holdings that carry both trailing and forward price-to-earnings multiples less than 12 (or see more of Kovner's stock picks):

One of Caxton’s top picks was General Motors (NYSE: GM), with the filing reporting a position of 2.5 million shares. This is more than double what his fund had owned at the end of September. GM made our list of the most popular stocks among hedge funds for the fourth quarter of 2012 (find more stocks hedge funds love), with many value investors arguing that U.S. consumers will have to replace their aging cars soon and that the auto industry will be able to capitalize on that demand. GM currently trades at 9 times trailing earnings, and its revenues ticked up slightly last quarter compared to the fourth quarter of 2011.

Caxton cut its stake in Wells Fargo (NYSE: WFC) by over 30%, but at 1.6 million shares the bank was still one of the fund’s five largest single-stock holdings by market value. Because Wells Fargo has a reputation as a safer bank than many of its peers, it trades at a premium to the book value of its equity with a P/B ratio of 1.3. However, by the criteria we’ve listed it actually does qualify as a value stock: Wells Fargo monetizes its assets so well that its trailing earnings multiple of 11 is well in line with many other large banks. In addition, revenue and net income have been up nicely, and we think it’s worth considering.

A slightly less reliable, but also cheaper, bank was another of Caxton’s favorite stocks: JPMorgan Chase (NYSE: JPM), which Caxton owned 1.1 million shares of at the end of 2012. JPMorgan is priced right about at book value, and at a slight discount to Wells Fargo at 10 times its trailing earnings. Of course, the bank does not share its peer’s reputation, though it would generally be considered safer than, say, Citigroup or Bank of America. Business has also been doing well; in the fourth quarter of 2012 JPMorgan experienced nearly 20% revenue growth versus a year earlier.

The fund increased its holdings of Ford (NYSE: F) to 3.4 million shares as well as buying GM, showing that it is generally bullish on autos. The stock posts trailing and forward P/Es of 9 and 8, respectively, so it is valued about the same as GM on the basis of trailing earnings, but analysts are forecasting lower growth. Still, even the cooler projections generate a five-year PEG ratio of less than 1, and any general recovery of the auto market would be expected to benefit both companies.

Regions Financial (NYSE: RF), a regional bank with a market capitalization of $11 billion, rounded out our list of Caxton’s cheap stock picks. This bank carries a significant discount to the book value of its equity: the P/B ratio is 0.7. Regions is highly sensitive to the broader economy, as shown by the stock’s beta of 2.3. The trailing P/E here is 11, so the valuation in earnings terms is well in line with the larger banks we’ve discussed even though the market value is well below what Regions estimates its assets are worth.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Ford, General Motors, and Wells Fargo. The Motley Fool owns shares of Ford, JPMorgan Chase & Co., and Wells Fargo. 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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