Billionaire Tom Sandell’s Top Stock Picks

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In May, Sandell Asset Management, a hedge fund founded and managed by Tom Sandell, filed its 13F for the first quarter of 2013 with the SEC. This filing disclosed many of the fund’s long equity positions in U.S. stocks as of the end of March; while these holdings might be a bit out of date as a result, investors can still treat them as free initial investment ideas and perform further research on any interesting names (see the full list of Sandell's stock picks).

We’ve also found that 13Fs can be useful resources in developing investment strategies (for example, the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). Read on for our quick take on five of the fund’s largest holdings as of the end of Q1 (leaving aside Virgin Media and Cymer, which have since been acquired).

Potential dividend stocks

Sandell increased its stake in Spectra Energy (NYSE: SE) to a total of over 2 million shares. Spectra is a $24 billion market cap company primarily engaged in gathering and transporting natural gas through its network of pipelines. It is somewhat notable as a potential income stock, with an annual dividend yield of 3.5%; the company has been fairly good in terms of maintaining and increasing its quarterly payments over the last several years. However, financial performance has been about flat and the stock is valued at 21 times forward earnings estimates.

Compuware (NASDAQ: CPWR) was another of the investment team’s top picks with the filing disclosing ownership of 4.6 million shares. The $2.3 billion market cap enterprise software and solutions company declared a $0.125 quarterly dividend following an attempted buyout by Elliott Management, and at current prices, that would make for an annual yield of 4.7% (though of course many income investors might prefer a company with a longer history of paying dividends).

Revenue was down 10% in its most recent quarter (fiscal Q4, which ended in March) compared to the fourth quarter of its last fiscal year.

The fund initiated a position of 1.5 million shares in KAR Auction Services (NYSE: KAR), which auctions off used or damaged vehicles, between January and March of this year. The dividend yield here is 3.2%, though we’d note that there is a limited history of paying dividends here as well.

Revenue and earnings were both up about 10% in the first quarter of 2013 versus a year earlier, though markets have already accounted for at least some of KAR’s prospects with the stock trading at 17 times consensus earnings for 2014.

More of Sandell’s picks

Sandell was also buying oil and gas refining and marketing company Phillips 66 (NYSE: PSX). The industry, as a whole, is characterized by low earnings multiples, and Phillips 66 is no exception with trailing and forward P/Es of 8. Wall Street analysts expect enough earnings growth over the next several years that the five-year PEG ratio is well below 1, and the stock is known as one of Warren Buffett’s top picks (find Buffett's favorite stocks). We’d be interested in doing more research on Phillips 66 and comparing the company to its peers.

NYSE EuroNext (NYSE: NYX) rounds out our list of Sandell’s top picks. The company’s shareholders have approved a merger with Intercontinental Exchange, as have EU regulators. Currently, NYSE EuroNext is valued at a small discount to the value of the 0.2581 shares of Intercontinental Exchange which shareholders will receive in the event of a deal.

The fund therefore appears to be engaged in merger arbitrage -- while absolute, unleveraged returns from this strategy are low, they may be attractive in annualized terms and tend to have little correlation with the overall market.

Conclusion

Investors who are interested in merger arbitrage plays might want to take a closer look at NYSE EuroNext, then, to evaluate the risk/reward offered by the opportunity. We also think that Phillips 66 could be a value play and would be worth further research.

Of course, income investors could certainly consider the higher-yielding stocks we’ve mentioned here, and certainly if Compuware could sustain its current payments, the yield of nearly 5% -- with a record of private interest in the company in case the stock price sinks too low -- it might be a good pick for an income portfolio.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in PSX. The Motley Fool recommends NYSE Euronext and Spectra Energy.. 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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