Billionaire Louis Bacon’s Cheap Stock Picks
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In May, billionaire Louis Bacon’s Moore Global filed its 13F form with the SEC for the first quarter of 2013.
We don’t recommend blindly following hedge funds’ picks, among other reasons because the information is often out of date by the time it is released to the public, but there are a few techniques investors can use to take advantage of the included information. For one, we have 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. We also think that hedge fund managers’ picks can be screened according to a variety of criteria, including low price-to-earnings multiples, to generate initial investment ideas and allow investors to further research any interesting names. Read on for our thoughts on the fund’s five largest positions in stocks with both trailing and forward Price/Earning multiples (P/Es) of 13 or less (or see the full list of Bacon's stock picks).
Finance & insurance stocks
Moore Global increased the size of its position in Assured Guaranty (NYSE: AGO) by 43% during the first quarter of this year, making the $4.2 billion market cap insurer of public finance and infrastructure bonds one of the fund’s largest holdings. Assured Guaranty is cheap in terms of its earnings- for example, the trailing earnings multiple is only 9- and compared to the book value of its assets (the P/B ratio is 0.9). The stock price is highly correlated to the broader economy- the beta is 2.0- but it is still interesting at these valuation metrics.
Another cheap stock from the finance & insurance sector in the fund’s portfolio is JPMorgan Chase (NYSE: JPM). The megabank is priced right about at book value, and at 9 times earnings whether we use its trailing numbers or forecasts for 2014 from Wall Street analysts- even after a more than 50% gain over the last year. Earnings have been up nicely, going by the company’s reports, and the dividend yield is almost 3%. Billionaire Ken Fisher’s Fisher Asset Management owned close to 13 million shares of the stock according to its own 13F (find Fisher's favorite stocks).
Also on our list of Bacon’s cheap picks is Discover Financial Services (NYSE: DFS). Discover is valued at 11 times its trailing earnings, even though in its most recent quarterly report it showed small increases in revenue and earnings compared to the first three months of 2012 (the company recently changed its fiscal year to the calendar year). With the company buying back shares, Earnings Per Share (EPS) increased at an even higher rate. Given the combination of stable to growing financials and a low valuation, we think Discover is a potential value stock.
Cheap tech picks
Bacon and his team were buying IBM (NYSE: IBM) between January and March, closing the first quarter (Q1) with 350,000 shares in their portfolio. The trailing and forward P/Es are 13 and 11, respectively, but the business appears to be struggling with changes in the technology environment: in the first quarter of 2013, revenue fell by 5% versus a year earlier with earnings down as well. We suppose IBM could improve EPS through share buybacks, as cash flow is quite high, though we’d generally prefer that value ideas be recording increases in revenue and net income.
The filing had Moore initiating a position of about 2.3 million shares in Dell (NASDAQ: DELL). Dell is currently a battleground between billionaire activist Carl Icahn and a consortium of private investors led by Silver Lake (who have founder Michael Dell’s support). Icahn appears able to finance his higher bid for the company, which has recently led the Board of Directors to ask the Silver Lake/Dell group to raise their bid in order to remain competitive. At the current price- a small discount to the proposed transaction prices- the trailing P/E is 13 though Dell’s business has been struggling.
We generally think that the financial picks from Moore Global’s portfolio look interesting in value terms, and would be interested in learning more about the companies. IBM, however, would have to report better numbers before we’d fell comfortable considering it and Dell will of course only be of interest to investors interested in merger arbitrage opportunities.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Dell.The Motley Fool owns shares of International Business Machines. and JPMorgan Chase & Co.. 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!