Billionaire Louis Bacon’s Long-Term Stock Picks
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Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds, including Moore Global, the hedge fund founded and managed by billionaire Louis Bacon. The primary purpose of our database is to help us research investment strategies (for example, we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year), but we can also look back a couple years to see which stocks individual managers have liked over the long-term.
Blindly imitating these picks is unwise, but they can be a source of free initial investment ideas -- similar to a stock screen -- with investors then doing further research on any interesting names. Read on for our thoughts on the three largest positions in Moore’s most recent 13F in which the fund had owned at least $25 million at the end of March 2011, or see the full list of Bacon's stock picks over time.
Moore Global reported a position of 5.2 million shares in Citigroup (NYSE: C) as of the end of the first quarter of 2013. With large banks generally doing well in the second quarter of 2013, Citi recorded 42% earnings growth versus a year earlier. The stock price has more than doubled from its levels a year ago, yet, Citigroup still trades at a discount to the book value of its equity with a P/B ratio of 0.8.
The stock probably shouldn’t trade much above book, considering Citigroup’s exposure to European assets and general macroeconomic concerns, but there could certainly still be some upside if its assets continue to perform in line with internal valuations. Wall Street analysts expect continued EPS growth, with consensus calling for a 2014 figure of $5.58, which implies a forward P/E of 9. Citigroup had been one of the most popular stocks among hedge funds in the first quarter of 2013.
The fund has been a long-term investor in JPMorgan Chase (NYSE: JPM), which, like Citigroup, has been producing good financial results going by its recent reports. Specifically, net income grew 31% in its most recent quarter compared to Q2 2012. In book terms, JPMorgan Chase carries a premium to Citigroup, with a market cap slightly above the book value of its own equity, but it has an advantage over many big banks in that its trailing earnings multiple is only 9. At that valuation, the company could hold its net income steady over the next several years and still be an attractive value opportunity.
Another long-term pick
Assured Guaranty (NYSE: AGO) was another of Bacon’s long-term stock picks; the most recent filing disclosed ownership of 7.2 million shares. Assured Guaranty insures public finance and infrastructure-related securities, and because municipalities’ finances are dependent on tax income, the stock is somewhat tied to the overall economy as shown by a beta of 2.0. In quantitative terms, the stock is cheap, with trailing and forward P/Es of 10 and 8, respectively, but investors may worry that borrowers have overextended themselves and that more credit events are likely in the future. At a market capitalization of $4.3 billion, this is not as widely known a name, and may merit some research into where Assured Guaranty’s portfolio is concentrated and how likely those bonds are to encounter problems.
Large banks appear to be a good source of value at this time, and investors should be looking at the industry (though of course, they should be sure not to concentrate their portfolio too heavily on financials). JPMorgan Chase does have some legal issues which may cause short-term problems, but trailing earnings have certainly been high enough that the valuation looks quite appealing at this time.
In the case of Citigroup, the bank does need to continue its strong performance for a bit longer to justify its valuation in earnings terms, but the stock does have the advantage of being priced at a discount to book. Assured Guaranty appears a bit riskier, but it is certainly cheap enough that the stock would seem to be worth a look.
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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Citigroup. The Motley Fool owns shares of Citigroup Inc 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!