Hedge Fund’s Top Consumer Discretionary Stocks

By Ashish Sharma - June 22, 2012 | Tickers: F, GM, HD, LOW | 0 Comments

• Email
• Print

Every quarter Bank of America analyst Mary Ann Bartels comes up with an analysis of 13F filings by the major hedge funds. Her report consists of the major buys and sells by the big funds and the top stocks in each sector held by the major hedge funds. Here’s a list of the top ten Consumer Discretionary stocks major hedge funds were holding at the last quarter end according to her recent report.

My favorite long candidates in the above lists are General Motors, Ford and Home Depot.

General Motors (NYSE: GM) and Ford (NYSE: F) are on the top of the list and are available at the lowest forward PE's among the above stocks. I believe both of them are low hanging fruits in the auto industry and one should consider building long positions in these stocks. Both of these companies are exposed to North American and BRIC markets which are among the fastest growing markets in the world. Volume gains and operating leverage should enable outsized EPS growth for these companies. In addition, the balance sheets of both the companies remain strong. GM, in particular has improved its balance sheet significantly after its bankruptcy. As of March 2012, GM had $26 billion in net cash. Due to its strong earnings and low tax payments I expect GM’s cash position to improve significantly over the next few years.                                     

The only risk I see for both the companies is their big pension liabilities. However, both of them are taking steps to reduce the pension risks. For example, GM recently announced that it would offer lump-sum payments to thousands of white-collar retirees to reduce its pension obligations, and would pay Prudential Insurance to take over its pension payments to other retirees. This will eliminate about one-fifth of GM’s pension obligations. Ford also had previously announced they will offer voluntary lump-sum pension payout options to eligible salaried U.S. retirees who agree to take it. If both the companies are able to reduce their pension liabilities, it can lead to a significant upside and increase their attractiveness to investors. At current valuations I believe risks from pension liabilities are already priced in both the stocks and would recommend buying them as their risk reward profile looks attractive. Warren Buffett's Berkshire Hathaway recently initiated position in General Motors. This further adds credence to the the argument that these stocks offer a deep value proposition to investors.

Among other stocks, Home Depot (NYSE: HD) also looks good. I believe it would be a good play on an eventual housing recovery. Although its peer Lowe’s (NYSE: LOW) is trading at relatively lower PE multiple, I prefer Home Depot as Lowe’s oversized network will continue to effects its business adversely. Lowe’s has underperformed Home Depot in same store sales each quarter since 2Q 2009. Lowe’s April comp underperformed Home Depot by 560 bps, the widest monthly gap since November 2010. In addition to the poor sales results, Lowe’s gross margins contracted 75 basis points year-over-year to 34.7% of sales last quarter. Although, Lowe’s is trading at a discount to Home Depot, I believe it is justified and there is a further downside possible if it continues to lose market share against Home Depot.

To sum up, General Motors and Ford are deep value opportunities in the auto sector which can appreciate significantly going forward as they continue to execute well and reduce their pension liabilities. Home Depot is another good long candidate to play the eventual housing recovery and its better execution versus Lowes makes it an attractive buy.

• Email
• Print
• Feedback