3 Intriguing Plays That This Hedge Fund Is Focusing On

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At Insider Monkey, we’ve reported on quite a bit of first quarter 13F filings thus far, but one hedge fund we haven’t taken a look at is Bernard Horn's Polaris Capital Management. Established in 1995, Polaris is an equity-focused investment firm with a penchant for value, and it recently reported that it manages over $4 billion in assets. It’s always important to track hedge fund sentiment because if you know where to look, you have the potential to beat the market. Let’s take a look at Horn and Polaris’ top five equity positions.

Top dog

The largest equity position in terms of value is in Infosys (NYSE: INFY), where the hedge fund holds a $95 million stake, consisting of 1,762,750 shares. Polaris was bullish on the company in Q1, raising the holding from 1.6 million shares worth $68.6 million reported at the end of December. The IT consulting and technology company has had an up and down 2013, with shares plummeting 20% on April 12 following a disappointing fourth quarter and below-average FY2013 guidance. The company expects its revenue to grow by 6%-10% over the current fiscal year, missing the 12% rate forecast by analysts, and even worse, the sell-side expects EPS to be stagnant this year.

It’s possible that Horn and Polaris are still bullish on Infosys, as it trades at attractive multiples—14 times forward earnings and a 0.98 PEG—but one could argue that these metrics are meaningless in a period of declining growth. The IT consulting marketplace as a whole doesn’t looking mind-blowingly attractive, with S&P citing “a hazy outlook for the global economy” as a key reason for why companies like Infosys don’t face the best of prospects moving forward. Thus, it’s also quite possible that Horn and Polaris have been stung by the IT consulting industry bellwether’s fall from grace, like most Infosys investors. Overall, we’d be cautious.

Teva

Teva Pharmaceutical (NYSE: TEVA) is also held by Polaris, and the fund's position is worth $88.1 million, up from $65.4 million disclosed at the end of 2012. The quantity of Teva shares in the holding advanced to 2,220,053 shares, from 1,751,753 at the close of the prior quarter, and the stock sports a forward P/E of 7.2x and a year-to-date return of above 7%. Unlike Infosys, there’s quite a bit to like about Teva’s for 2014 and beyond.

While mainstream companies like Vivus and Arena get most of the hype in the pharma space, Teva’s footprint in the generic drug marketplace should not be overlooked. In the same economic rationale as generic foods becoming more popular post-recession, Teva’s generics have seen increased demand in the past few years. What’s more, the company’s staple of proprietary products—multiple sclerosis drug Copaxone, the duo of Provigil and Nuvigil for sleep disorders, and Parkinson's drug Azilect, to name a few—are key strengths.

From a valuation standpoint, shares of Teva trade at a ridiculously low 7 times forward earnings, and while EPS did shrink by an average of 1% annually over the past half-decade, future growth is expected to pick up. Wall Street believes that Teva will expand its bottom line by 7.1% a year through 2017, and if higher-margin products like Copaxone can see extended shelf life post-patent via changes in dosage requirements, there is upside to this figure.

Marathon Petroleum

The hedge fund also reported ownership of 910,791 shares of Marathon Petroleum (NYSE: MPC), down from 939,391 shares reported in the previous filing. The value of the stake increased to $81.6 million, from $59.2 million, however, as shares of the oil and gas refiner & marketer have returned more than 25% year-to-date. Marathon Petroleum is still trading at a forward P/E of 7.4x, and we’ll be watching its plans to spend $300 million to augment refining capacity in two facilities in Ohio’s Utica shale.

Marathon also has refineries in East Texas, Louisiana, Illinois, Kentucky and Detroit, Michigan. Aside from being a bet on domestic energy—something we’ve seen a lot of lately in the hedge fund industry—Horn and Polaris’ play in Marathon specifically indicates their willingness to dig deep into the value bin. Some investors may prefer E&P companies, or even the barges that ship oil down to LNG export facilities, but on the whole Marathon offers a bargain that literally can’t be beat.

The company’s stock sports the fifth lowest year-ahead earnings multiple of its peers in the refining industry, and its price-to-sales multiple is at a whopping 70% below parity. A PEG near 0.70 also indicates that Mr. Market doesn’t believe the sell-side’s earnings forecast of 11% annual growth over the next five years, which is below peers like Tesoro and Eagle Rock. Needless to say, if Marathon can prosper in the Utica shale while holding steady in the rest of its operations, this discount should be erased sooner rather than later. It’s easy to see why Polaris is bullish.

Best of the rest

Polaris disclosed a $68 million stake in BHP Billiton, totalling 1,171,049 shares. In the previous filing, the hedge fund reported holding 1,034,749 shares, worth $72.8 million. Carter's is the last in our top five list, with the fund holding a $64.6 million position. The number of shares held by the fund remains unchanged from the end of last year at 1,127,851 shares. The previous value of the holding was $62.8 million.

Final thoughts

It appears that Polaris is loaded up on each of its top holdings for very different reasons. From Infosys’s position as IT’s falling knife to Teva Pharmaceutical’s desirable mix of generic and patent-protected drugs, there are plenty of reasons to pay attention. Don’t forget about energy play Marathon too, as there’s a potential for a massive value-based appreciation in the coming months. Learn why you should track hedge fund sentiment.

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This article is written by Alex Oleinic and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. 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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