Billionaire James Dinan’s New Stock Picks

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

Several weeks after the end of each quarter, hedge funds such as billionaire James Dinan’s York Capital Management file 13Fs with the SEC to disclose many of their long equity positions as of the end of that quarter. Even though the information in 13Fs may well be out of date by the time it is released, we’ve actually found that it can be used to develop investment strategies; for example, the most popular small cap stocks among hedge funds tend to outperform the S&P 500 by an average of 18 percentage points per year. We also like to look for initial investment ideas among top managers’ new stock picks, doing further research on any interesting names. Read on for our thoughts on five of York’s largest new holdings as of the end of March and compare these picks to previous filings.

Dinan and his team bought 4.9 million shares of Virgin Media, making the stock one of their five largest holdings by market value after not having owned any shares at the beginning of the year. Virgin is in the process of merging with Liberty Global; hedge funds often like to invest in the stock of acquisition targets since the returns on this investment depend on whether the deal closes rather than on changes in the company’s fundamentals, and so have little relationship to the broader economy. Funds can also use high leverage to magnify their returns.

Commercial real estate advisory and investment company CBRE Group (NYSE: CBG) was another of York’s new stock picks with the filing disclosing ownership of 6.3 million shares. Given the sensitivity of commercial real estate demand to the overall economy, it’s not surprising that CBRE’s beta is high at 2.3. In the first quarter of 2013, the company experienced a 39% increase in earnings versus a year earlier, due primarily to higher margins but also helped by a 9% gain in revenue. Some future growth is already included in the stock price, however, at a trailing P/E of 23.

Another special situation making for a new pick in the fund’s portfolio is the impending breakup of News Corp (NASDAQ: NWSA); Dinan initiated a position of over 5 million shares during Q1. A number of funds, including billionaire Stephen Mandel’s Lone Pine Capital, were buying News Corp between January and March (check out Mandel's stock picks). In theory, the breakup of the company will act similarly to a spin-off opportunity, with management of the sibling companies better able to improve operations and therefore create more value for shareholders.

York reported owning 1.9 million shares of Hess (NYSE: HES) as of the beginning of April. Hess is another company where investors are looking for gains from a potential spin-off--in this case, of the business’s downstream operations. At its current valuation of $23 billion, Hess trades at 11 times forward earnings estimates, which is even to slightly above where many other large oil and gas companies are trading. The most recent quarterly report showed very strong revenue and earnings numbers compared to the same period in the previous year.

Rounding out our list of York’s new stock picks was its 3.9 million shares of Hartford Financial Services (NYSE: HIG). The property and casualty insurance company trades at a considerable discount to the book value of its equity, with a P/B ratio of 0.6. Even though business has not been great, this suggests that Hartford has significant upside potential merely from investors gradually coming to accept the company’s internal asset valuations. Analyst expectations for 2014 imply a forward P/E of 8, so Hartford is arguably a value play in that sense as well.

We’re quite interested in the opportunities at Hess and News Corp--the valuations at each are low enough, compared to recent performance and these companies’ peers, that very little improvement from the special situation is required to make the stocks good values. Hartford also looks interesting, assuming that the company comes close to analyst forecasts for next year and does not see a large write down in its assets. As for CBRE, we’ve noted the high earnings multiple but growth has certainly been high; we’d want to see that strong bottom-line performance continue, and may watch to see how its next quarterly results come out.

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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 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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