Hedge Fund Peconic Partners’ Top Picks

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William Harnisch founded Peconic Partners in 2000 after 22 years at Fosrtmann-Leff Associates, where he eventually became President and CEO. We track Peconic’s quarterly 13F filings alongside those of hundreds of hedge funds and other notable investors, having learned that the information in these filings can be useful in developing investment strategies (for example, 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).

Investors can also look through top stock picks from individual investors in an attempt to identify potentially cheap names for further research. Read on for our quick take on Peconic’s five largest holdings by market value as of the end of March or see the full list of Harnisch's stock picks.

Construction companies

The fund reported a position of 2.1 million shares in MasTec (NYSE: MTZ), a $2.6 billion market cap construction company specializing in energy and power infrastructure. MasTec’s stock price has more than doubled in the last year, as markets expect demand to grow; pipelines, for example, will be built to serve the burgeoning natural gas industry.

Revenue and earnings were each up over 20% in the first quarter of 2013 versus a year earlier, and while markets have priced in some growth, Wall Street analysts are still bullish; their forecasts imply a five-year PEG ratio of 0.7.

Peconic owned 1.7 million shares of Quanta Services (NYSE: PWR), another company focused on building energy and power infrastructure, at the beginning of April. Recent growth numbers have been strong here, as they have been at MasTec, but both investors and the sell-side appear to have lower expectations for its future earnings as the stock trades at “only” 18 times trailing earnings with the forward multiple being only slightly lower. Billionaire Israel Englander’s Millennium Management had 1.1 million shares of Quanta in its portfolio according to that fund’s own 13F (find Englander's favorite stocks).

Another construction related stock in Peconic’s portfolio was Dycom Industries (NYSE: DY), though it mainly serves telecom and TV providers. In its most recent quarter, revenue rose 48% compared to the same period in the previous fiscal year, but due to higher costs, the company ended up recording a decline in net income.

Analysts expect the company to recover, however, and apparently to begin converting the higher revenue numbers into profits: they have the stock at a forward P/E of 17 and a five-year PEG ratio well below 1.

Two more of Peconic’s picks

Movie theater operator Regal Entertainment (NYSE: RGC) was another of Harnisch’s top picks with the filing disclosing ownership of 2.9 million shares. Conditions have not been good for Regal, going by recent reports, and with the stock trading at 25 times trailing earnings, many market players seem to believe that it is too expensive: according to the most recent data, 20% of the float is held short.

The stock pays a $0.21 quarterly dividend, making for an annual yield of 4.4% at current prices, though income investors should still be concerned about its valuation.

Harnisch and his team increased their stake in Flotek Industries (NYSE: FTK) by 30% between January and March to a total of 2.5 million shares. Flotek provides chemicals and equipment used for oil and gas companies for drilling. It’s another stock which has more than doubled in the last year, though it appears to be encountering challenges: revenue has leveled off over the last year, according to recent reports. Even with a trailing P/E of 19, we’re interested enough in the industry that we’d be interested in learning more about Flotek.

Conclusion

MasTec certainly has high enough expectations for growth that we would want to take a closer look at that company as well, and we’re also curious as to why Quanta wouldn’t be doing as well since it is in a similar business and that company’s financial performance has been good.

Dycom is a tougher call: analysts are bullish but we would prefer to wait until the company has shown that it can grow its revenue without hurting its margins as much as it has recently. As for Regal, the dividend yield is certainly high, but again, the weakness of its recent business conditions would probably be enough for most income investors to stay away.

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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 MasTec. The Motley Fool owns shares of MasTec. 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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