Billionaire Israel Englander’s New Stock Picks

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Millennium Management, a hedge fund managed by billionaire Israel Englander, filed its 13F for the first quarter of 2013 with the SEC in May. This most recent round of filings disclosed many of hedge funds’ long equity positions in U.S. stocks as of the end of March. Even with the information being somewhat old, we’ve found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year, and we think that more strategies are possible as well. We also like to go through individual filings and see which stocks were added to the portfolio over the previous quarter. Here are our thoughts on five of Millennium’s largest new positions from the 13F (or see the full list of Englander's stock picks).

The fund bought 1.8 million shares of Virgin Media during the first quarter of the year. Liberty Global has announced plans to merge with Virgin, creating a merger arbitrage opportunity. Many hedge funds like to invest in merger arbitrage situations since the return on these investments depends entirely on the transaction closing, reducing market exposure; hedge funds can generally apply a good deal of leverage to their position resulting in high returns (particularly on an annualized basis).

Millennium initiated a position of a little over 1 million shares in health insurance company Aetna (NYSE: AET). In the first quarter of 2013, Aetna’s revenue grew by 7%, but thanks to compression in its net margins the company’s earnings actually fell slightly. Wall Street analysts expect that trend to reverse, and are actually looking for decent increases in EPS going forward. With the stock trading at 13 times trailing earnings as is, the Street’s bullishness pulls the forward P/E down to 9. Billionaire David Einhorn’s Greenlight Capital had 6.5 million shares of Aetna in its portfolio according to that fund's own 13F (find Einhorn's favorite stocks).

Expeditors International (NASDAQ: EXPD) was another of Englander’s new stock picks, with the filing disclosing ownership of 1.4 million shares of the $7.8 billion market cap logistics company. The market is pricing in high growth at Expeditors; specifically, the trailing earnings multiple is 24. However, recent financial results have not been in line with this expectation: last quarter sales were about flat compared to the first quarter of 2012, while growth on the bottom line was only 5%. Even with the sell-side calling for improvements in earnings over the next year and a half, we would avoid the stock.

According to the 13F, Millennium owned about 920,000 shares of Companhia de Bebidas das Americas (NYSE: ABV) at the beginning of April. Bebidas das Americas, or “Ambev," distributes alcoholic beverages and soft drinks in Latin America, with distribution agreements with both Pepsico and Anheuser-Busch Inbev. At a market capitalization of $116 billion, the stock carries trailing and forward P/Es of 22 and 18, respectively. However, as with Expeditors, Ambev's recent financial performance has been sluggish and certainly not high enough to make the company a buy from our perspective.

Englander and his team reported a stake of about 530,000 shares in General Dynamics (NYSE: GD), a manufacturer of aircraft, warships, and military vehicles. General Dynamics trades at 11 times forward earnings estimates, likely reflecting some concern from investors that cuts in U.S. military spending will hurt the company’s business. Revenue was in fact down slightly in its most recent quarter compared to the same period in the previous year, though General Dynamics did manage to cut costs as well and as a result earnings came in 1% higher.

We’ve mentioned that Expeditors and Ambev look a bit pricy to us right now, considering that their respective businesses have not been doing so well. We’re also not sure how much opportunity there is for retail investors in Virgin Media. That leaves General Dynamics and Aetna, which are similar in that there is political/regulatory risk involved and recent results have been mediocre, which have led to these stocks- as well as the rest of their industry- carrying low earnings multiples. It’s possible, then, that these companies or their peers could make for potential value plays.

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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 owns shares of Expeditors International of Washington and General Dynamics. 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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