Billionaire Louis Bacon’s New Stock Picks
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We track quarterly 13F filings from hundreds of hedge funds, including billionaire Louis Bacon’s Moore Global. Even though the information in 13Fs is a bit old, there are still a few ways for investors to use it. For one, we’ve found that it’s possible to develop investment strategies based on hedge fund activity--one example is our finding that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year. We can also compare the most recent filing to the previous one to see which stocks top managers added to their portfolio in the previous quarter, and then determine if each of these picks is worthy of further research. Here are five of the largest new positions in Moore’s 13F for the first quarter of 2013 (or see the full list of Bacon's stock picks here).
The fund bought 4.5 million shares of Morgan Stanley (NYSE: MS) between January and March. The investment bank’s stock price has roughly doubled in the last year, but it remains discounted relative to the book value of the equity at a P/B ratio of 0.8. While Morgan Stanley’s earnings have been low on a trailing basis compared to the valuation, Wall Street analysts expect conditions to improve in the next year and a half and as a result the forward P/E is 10. With revenue up, we think that Morgan Stanley is worth considering even as many other big banks remain cheap.
Bacon and his team initiated a position of 1.3 million shares in Time Warner (NYSE: TWX). The $55 billion market cap media and entertainment company trades at 18 times trailing earnings, which is about even with peers such as News Corp and Disney as the industry is seen as having good prospects. Time Warner’s own earnings grew 24% last quarter compared to the first quarter of 2012, though revenue was actually about flat, so we’d be concerned that high growth in net income is not sustainable.
Moore added Dell to its portfolio in the first quarter of 2013. Private equity group Silver Lake is leading a bid to take Dell private, as is billionaire activist Carl Icahn (research more stocks Icahn owns). The decline of the PC business has hit Dell hard, particularly on the bottom line, but cash flow is high enough that these investors think they can make a profit on a buyout. Merger arbitrage is a common hedge fund strategy, since the returns on the investment depend on whether or not a deal closes rather than on economic conditions.
Bacon apparently likes Icahn’s moves: the activist has taken a large position in offshore driller Transocean (NYSE: RIG) with Bacon’s fund reporting a new stake of 825,000 shares as of the end of March. Revenue grew only 4% in the first quarter of 2013 versus a year earlier, but the sell-side is quite bullish on the business: their consensus earnings forecasts imply a forward P/E of 9 and a five-year PEG ratio considerably less than 1. As such we’d be interested in learning more about the company, though other offshore drillers might also be intriguing.
Lowe’s (NYSE: LOW) rounds out our list of Moore Global’s new stock picks with the filing disclosing ownership of 1 million shares. Home improvement stores such as Lowe’s and Home Depot have been popular ways to play a housing and construction recovery; markets, anticipating earnings growth, have bid up Lowe’s to a trailing P/E of 24. While analysts are calling for high growth in EPS (and as a result the forward earnings multiple is 17) recent financial results have actually not been that strong and we would avoid the stock.
Time Warner and Lowe’s are both industry plays in our mind, though we aren’t confident in these stocks given their recent quarterly reports. Transocean looks like it could be a good value, particularly if the company actually does grow its earnings as analysts expect, and at the very least it should be watched to see if this quarter’s numbers reflect a stable business. Morgan Stanley also stands out for its decent recent performance as well as its discount to book, and we think it could be considered as a potential value stock.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has long positions in Dell and Morgan Stanley. The Motley Fool recommends Lowe's. The Motley Fool owns shares of Transocean. 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!