Growth and Value: This Hedge Fund Aims For Both
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I always like to analyze what hedge funds portfolio managers have been buying or selling in the recent quarters. In fact, I have a list of hedge funds (which is shared here) that I track and one of them is DiamondBack Capital. The peculiarity of this hedge fund is that it will be liquidated at the end of the year because they're connected with the insider-trading probe raided by the FBI two years ago. I find it interesting to analyze the final portfolio of DiamondBack because the fund has been one of the top performers of value oriented hedge funds in the past years. In fact, it grew to $6 billion under management and had 140 employees. Let's review DiamondBack stock selections before they are liquidated.
DiamondBack likes technology stocks at attractive prices
Diamondback selected just two technology stocks: Yahoo and Apple. The hedge fund's top holding is Yahoo! (NASDAQ: YHOO), a tech stock that several value hedge funds also selected (Fir Tree, Third Point, among others). Yahoo possesses unique scale and scope as the Internet’s premier digital media company. I am bullish on the fact that Marissa Mayer is leading its turnaround considering her past performance and experience in Google. While I think the stock could keep its uptrend that started after the company reported its last quarterly results, I think that shares will consolidate in the $19/18 area for the coming months.
Why I think this? By reading Third Point's investment thesis at the moment of initiating the position in Yahoo, the hedge fund analyzed that shares could get to a $19 valuation level considering a 7x 2012 EBITDA which is the valuation model that discounts a better management for Yahoo. At the time that Third Point invested, the company had management problems so its investment thesis finally materialized with Mayer as a CEO and shares got to that level.
DiamondBack also holds Apple (NASDAQ: AAPL) but the weight of 1.13% of Diamond's portfolio in that stock is much lower than Yahoo's 3.8%. I find interesting that, similar to what Blue Ridge and Citadel did, the hedge fund reduced the position 17% from Q2. Blue Ridge reduced it by 12% and Citadel 17%. I think that Apple will consolidate in the $540/530 range before rebounding to the $650 level. Apple will end the year with $150 per share in net cash and a 5-6x CY 2012 free cash flow ex-cash which is very cheap for a company that is growing at above than average levels. I think the stock at $540 has a healthy margin of safety and a favorable product cycle. I think the market is discounting that Apple will release zero new product categories after the iPhone or iPad and I think that won't happen considering the potential that Apple could have in the mobile payments segment and an iTv which mixes movies and gaming in just one device.
Bullish on financials
The hedge fund seems bullish on the financial or insurance sector considering that it considerably added to the existing positions in Capital One (+573% vs. Q2), AIG (+132% vs. Q2) and JPMorgan (+45% vs. Q2).
I like JPMorgan (NYSE: JPM). David Tepper's Appaloosa also likes this stock, evidenced in the new position the fund started in the recent quarter. Diamond has been buying JPMorgan at an average price of $37.50. I am bullish on the whole banking sector. I think that investors will reward banks in 2013 considering that housing is recovering (40% of bank assets according to Credit Suisse) and commercial loans too. In fact, Oppenheimer recently issued a report explaining that JPM's commercial banking segment is doing very well, earning about a 24% return on its allocated capital (7% of total JPM revenues), and YTD loans are up 16%. The report also expressed that CEO Doung Petno is very confident on loan growth for 2013. He said: ¨Everyone is back in business." Diamondback seems to be positioning for a banking recovery in 2013 by holding AIG, JPMorgan and CapitalOne as core positions.
The fund also seems to be bullish on specific energy picks, such as Sunoco (increased 371% vs. Q2) and Transocean (+159%).
I think that Diamondback bought Transocean (NYSE: RIG) because demand for offshore and particularly deepwater drilling has been strong this year. The industry witnessed a total of 46 ultra-deepwater contracts being executed this year, the highest number seen since 2008 according to Trefis.This trend is positive for Transocean, which was reflected in its most recent fleet update issued in November. Transocean reported new contracts at rates between 20% and 70% higher than that for previous contracts (Transocean Fleet Update Summary). Utilization rates rose to 77% last quarter compared to the average rate of 57% last year. This metric shows that demand for Transocean services are improving.
Transocean is the world’s largest offshore driller and could potentially benefit from offshore activity in both Brazil and Africa. Brazil has emerged as one of the most sought-after regions for oil exploration and Africa has strong potential for rig development.
This is the last portfolio update investors can get from Diamondback because the fund will not be operating in 2013. I like the hedge fund's core investment thesis: find growth at attractive prices. It seems to reflect this thesis in the positions the fund held in Yahoo, Apple, Allergan, Transocean and other companies. If I were to select my 3 top stocks from Diamondback's portfolio, I would pick AIG, Apple and JPMorgan.
martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, JPMorgan Chase & Co., and Transocean. Motley Fool newsletter services recommend Apple. 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!