Billionaire Ray Dalio’s Inexpensive Stock Picks

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In May, Bridgewater Associates -- one of the largest hedge funds in the world, managed by billionaire Ray Dalio -- filed its 13F for the first quarter of 2013. Even though the information in 13Fs is a bit old, we believe that there are still ways for investors to make use of it. For one, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year and think that other strategies are possible as well.

We also like to screen picks from top managers according to a number of criteria, including the traditional value metric of low price-to-earnings multiples, allowing investors to do more research on stocks which interest them (as any stock screen works). Read on for our quick take on Bridgewater’s five largest positions as of the end of March in stocks with both trailing and forward P/Es of 13 or lower, or see the full list of the fund's stock picks.

Bridgewater’s top cheap pick

Dalio and his team increased their stake in Intel (NASDAQ: INTC) by 38% between January and March, to a total of over 1 million shares. In the first quarter of 2013, Intel’s revenue fell slightly versus a year earlier, contributing to a 25% decline in net income. Wall Street analysts expect business to stabilize and, as a result, both the trailing and forward earnings multiples are 12, but we are skeptical. Fisher Asset Management, managed by billionaire Ken Fisher, owned about 19 million shares according to its own 13F (find Fisher's favorite stocks).

More cheap picks: insurers and defense contractors

Bridgewater was buying Lockheed Martin (NYSE: LMT) during Q1, and entered April with about 220,000 shares in its portfolio. Aerospace and defense companies are at risk from potential cuts in federal spending, though to some degree this is already accounted for in Lockheed Martin’s valuation as it trades at only 12 times earnings -- whether we consider trailing results or consensus forecasts for 2014. We’d also note that Lockheed Martin offers a dividend yield of 4.4% and tends to have a weak relationship with market indices with a beta of 0.6.

Another low-expectations, but potentially value, stock in the fund’s portfolio was Humana (NYSE: HUM). Valued at 10 times trailing earnings -- and with the sell-side not expecting much improvement on those numbers next year -- Humana achieved significant growth on the bottom line in its most recent quarter compared to the same period in the previous year though revenue was up only 3%. Many health insurers are carrying cheap valuations as investors worry about future regulation of their market, though at least in this case, we’re at least somewhat intrigued by the combination of low growth but low multiples.

Bridgewater also liked UnitedHealth (NYSE: UNH), increasing the size of its position in the health insurer by 75%. Last quarter, UnitedHealth’s revenue grew 11% compared to the first quarter of 2012, but thanks to lower margins, its earnings actually declined. Analysts expect that trend in net income to reverse, and so, the stock features trailing and forward earnings multiples of 13 and 11, respectively. This places UnitedHealth at a small premium to Humana, though at least in revenue terms, it has been achieving higher growth and it is a larger company by market cap.

Dalio disclosed ownership of a little less than 190,000 shares of Northrop Grumman (NYSE: NOC). While Northrop Grumman doesn’t look quite as attractive from an income perspective as Lockheed Martin, it does pay a 3% yield. It also meets the value criteria we’ve set out here, with a valuation of 11 times either its trailing earnings or forward estimates, though of course there would be concerns about how it would handle lower federal spending as well. So far, Northrop Grumman’s business has been showing little change, going by recent reports.

Conclusion

From a long-term perspective, we’re interested in aerospace and defense companies as potential value plays, and would be interested in learning more about the two we profiled here. The health insurers and Intel seem to have higher risk over the long-term, as future policy could significantly impact the health insurance industry and the shift in consumer preferences which have been harming Intel’s business look set to continue.

Still, we could see a diversified portfolio potentially taking advantage of low multiples, particularly on health insurers, with the hope that they would be able to deliver at least modest earnings growth in the future.

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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 recommends Intel and UnitedHealth Group. The Motley Fool owns shares of Intel, Lockheed Martin, and Northrop Grumman. 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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