This Mega Hedge Fund Is Bullish on These Stocks

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

SQ Advisors has roughly $1.2 billion in its equity portfolio, which is heavily weighted with stocks from the financial and services sectors. Overseen by manager Lou Simpson, the fund has seen growth of a little more than one percent so far this quarter. It’s extremely important to pay attention to hedge fund sentiment because studies have shown that the smart money’s best small-cap picks can beat the S&P by over 18 percentage points a year.

That’s annually. Learn more here.

Numero uno

Topping the list of stocks in the hedge fund is Berkshire Hathaway (NYSE: BRK-B). For the week of April 8, the stock closed at a new 52-week high of $106.33. Consider this: Berkshire Hathaway shares almost tripled the S&P 500's 11.8% return over the last twelve months, with a 30% gain, noted Motley Fool writer Daniel Sparks.

As we noted a couple months ago, the most attractive aspect of Berkshire Hathaway is its linkage with Warren Buffett. Our own Mark Jones said, “the simple idea I'm suggesting is that you can have peace of mind knowing that Warren Buffett is looking over part of your portfolio while you scour around for the next big winner. As investors, we understand the importance of not leaving cash idly sitting around. If you're struggling with ideas on where to put some of your investment cash in 2013, Berkshire Hathaway is a low-risk way to capitalize on long-term growth.”

That’s very well put, and it’s also worth noting that at current market prices, investors can actually obtain Class B shares of Berkshire Hathaway for a slight discount. The diversified holding giant trades at a mere 16.8 times trailing earnings, a 9.5% discount to its five-year historical average.

Berkshire’s book and sales multiples are also chugging right along with industry and historical norms, and margins (operating) are only about 30 basis points off five-year highs, at 13.7% (ttm). In short, there are plenty of reasons to like Berkshire for its business without having to get into the valuation analysis, but when a company with this pedigree is actually cheap, we understand why SQ Advisors is so bullish.

A tech investment…twofold

Then there is TE Connectivity (NYSE: TEL). It touts itself as a technology leader in connecting power, data, and signal in everything from automotive and aerospace to broadband communications, consumer, energy, and industrial applications. The stock has risen steadily since October, closing within $0.85 of its 52-week high of $41.76 recently.

The company reported second-quarter earnings on April 24, coming in with EPS of $0.76, $0.05 above Wall Street estimates. TE met on the revenue side - booking a top line of $3.3 billion for the quarter - indicating that cost-controls were the key factor behind the bottom line beat.

In the long run, analysts expect TE to generate earnings growth of 13% annually through at least 2017, and the company's latest report is a step in the right direction. At a PEG of 1.17, shares of TE aren't particularly expensive at the moment, and are nearly in line with Corning's 1.02 PEG valuation.

TE Connectivity’s market cap is also nearly on par with its peer Corning, at $17.5 billion compared to Corning’s $19.7 billion cap. Other competitors include Alcatel-Lucent and Molex.

SQ Advisors owns about three million shares of Oracle (NYSE: ORCL). This stock has enjoyed a brief jump of late. That partially stemmed from Pacific Crest Securities reiterating its outperform rating on the stock. This is significant, considering the tumble the company’s stock price took following the release of its third-quarter earnings in March. Needless to say, the company had missed Wall Street estimates.

However, since meeting with Oracle execs, Pacific Crest Securities’ Brendan Barnicle said he understands that the miss largely stemmed from internal issues plaguing the company. It had less to do with a drop in demand for Oracle products. Barnicle noted that Oracle will likely show better results in the fourth quarter as it improves its internal problems; so, there is upside in Oracle to $44 a share. It reports those earnings on June 17.

In the meantime, a challenge the company faces is trying to increase its market share in the cloud computing business. Called Software-as-a-Service model, the service is ideal for those who don’t want to own a license for their Oracle software. Customers get one monthly expense that includes Oracle software, support, hosting, and application management. This is a move away from the way customers have traditionally bought products from Oracle, which was by purchasing the software through sales of licenses upfront.

The cloud computing space is growing more crowded by the day, it seems, as companies realize the cost-savings and efficiencies they can achieve through the services. Oracle’s chief competitors are Amazon, Microsoft, Google, Rackspace, and salesforce.com.

Financial bets

Owning about 2.7 million shares of Wells Fargo (NYSE: WFC), the value of this holding for SQ Advisors is roughly $95 million. All eyes were on the company's earnings for the first quarter. Specifically, investors and traders were looking to see how the bank’s mortgage business fared.

Over the course of 2012, the bank originated roughly $524 billion in mortgages. That’s about a third of all of the mortgages in the U.S. In its Q1 results, Wells Fargo reported a solid EPS of $0.92, outpacing consensus estimates of $0.88, but revenue missed by 1.5%.

As the provider of several financial services, including securities brokerage, banking, money management, and financial advisory services, Charles Schwab (NYSE: SCHW) has an impressive market cap of roughly $22 billion, and is another pick in the SQ portfolio. Its peers include E*TRADE and TD Ameritrade.

On tax day, April 15, Schwab reported its earnings for the first quarter. The company came in light on the earnings side, reporting a bottom line of $0.15 per share, a penny below Wall Street’s consensus. Revenue of $1.3 billion met analysts’ expectations, and there haven’t been any major changes in their views for the next few quarters.

By the end of the third quarter, the Street expects Schwab to reach an EPS of $0.20, nearly 18% higher than the company’s EPS in the same period of its 2012 fiscal year. Schwab trades at mediocre earnings and free cash flow valuation multiples, and a dividend yield near 1.4% isn’t mind-boggling.

Still, it’s the company’s bottom line growth that should give bulls optimism, as it’s expected to generate annual EPS growth of 14%-15% over the next five years; that’s eight-highest in the investment brokerage (national) industry, above peers like Morgan Stanley and TD Ameritrade.

On the whole, SQ's position in Schwab is its fifth largest, but the company's year-to-date performance has been impressive, returning over 16%. The rest of this hedgie's top picks -- Wells Fargo, Oracle, TE Connectivity, and Berkshire Hathaway -- each represent a respectable play in their own right. To see the fund's entire 13F portfolio, continue reading here, on Insider Monkey.


This article is written by Tedra DeSue and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Meena has long positions in MSFT, GOOG, and MS.  The Motley Fool recommends Berkshire Hathaway and Wells Fargo. The Motley Fool owns shares of Berkshire Hathaway, Oracle., 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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