Billionaire James Dinan’s Long-Term Stock Picks

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds and other notable investors, including billionaire James Dinan’s York Capital Management, as part of our research of investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year).

These filings can also be used as a source of free initial investment ideas. While the fund’s most recent 13F discloses many of its long equity positions as of the end of March, we can use our database to identify stocks which York had owned over the past two years (and therefore should be more likely to still own today). Read on for our quick take on the five largest positions in its portfolio which it owned at least $60 million of at the end of March 2011, or see the full list of stocks the fund reported owning.

Equipment

Dinan and his team reported a position of about 11 million shares in Hertz Global Holdings (NYSE: HTZ) in the filing. Hertz is best known for its rental car business, the source of most of its revenue and pre-tax earnings, but it also rents construction and industrial equipment. The company recently acquired Dollar Thrifty, the latest development in the consolidation of the rental car industry.

Some analysts believe that this consolidation will give rental car companies such as Hertz more pricing power, though of course, buying the stock would also carry integration risks. Even after rising over 130% in the last year, Hertz is valued at only 11 times forward earnings estimates and a five-year PEG ratio well below 1 as Wall Street analysts expect high earnings growth over the next several years. Investors should note that Hertz is highly dependent on the overall economy with a beta of 2.8.

Crane company Manitowoc (NYSE: MTW) has been another of Dinan’s long-term stock picks according to our database. With demand for cranes being tied to construction, Manitowoc features a beta of 4.2; while the stock has roughly doubled in the last year, this is actually about what would be expected statistically given that beta and the S&P 500’s return of 25%. At a market capitalization of $2.8 billion, Manitowoc trades at 12 times forward earnings estimates with optimistic projections from analysts placing its five-year PEG ratio well below 1.

Another long-term pick

York owned 3 million shares of General Motors (NYSE: GM) at the end of the first quarter of 2013. The automaker had made our list of the most popular stocks among hedge funds for the quarter (check out the full top ten list) as bulls argue that U.S. consumers’ cars are older than the historical average, meaning that the industry is poised for pent-up demand. This was one of billionaire David Einhorn of Greenlight Capital’s arguments for GM in his bullish presentation on the company last fall; Einhorn had also suggested that European operations might break even in the next couple years and that the company had a strong position in China.

GM’s auto revenue grew only 3% in the second quarter of 2013 versus a year earlier, and after a weak Q1, automotive sales are essentially flat year to date. Operating and net margins have shrunk, and as a result, General Motors recorded a 27% decrease in net income last quarter compared to the prior year period. The stock is now valued at 13 times trailing earnings, which might be in value territory if its business was actually growing. The sell-side is bullish, with a forward P/E of only 8 and a five-year PEG ratio of 0.7, but investors should probably still avoid it for now based on recent performance or at least consider other automakers as alternatives.

Conclusion

Still, investors should probably wait for better financials from General Motors before considering a buy. As for the two equipment companies, investors are right to be wary of the sell-side’s bullishness, but certainly, the potential upside is high enough that it would be worth taking a closer look at them.

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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 General Motors. The Motley Fool owns shares of Hertz Global Holdings. 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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