5 Banking Stocks To Buy Now According To This Elite Hedge Fund

John Horseman founded Horseman Capital, a London-based long/short equity hedge fund, about a decade-and-a-half ago. The fund has grown by leaps-and-bounds since then, as it now has an equity portfolio worth $393 million as of September 30. The fund’s equity portfolio is invested heavily in financial stocks, which account for 65% of its portfolio value. Much of that is due to the fund’s major investment in five banking stocks, which make up five of its top six long positions overall. In these article, we’ll take a closer look at these five banking stock picks of Horseman Capital, which are Wells Fargo & Co (NYSE:WFC), Capital One Financial Corp. (NYSE:COF), Bank of New York Mellon Corp (NYSE:BK), Goldman Sachs Group Inc (NYSE:GS), and U.S. Bancorp (NYSE:USB).

First a little about our site. Insider Monkey tracks hedge fund sentiment. Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).

#5 U.S. Bancorp (NYSE:USB)

Shares held (as of September 30): 731,500
Total Value (as of September 30): $30 million
Percent of Portfolio (as of September 30): 7.63%

With a return-on-equity (ROE) of 14.3%, U.S. Bancorp (NYSE:USB) earns one of the highest ROE’s in the industry. It’s not a surprise, as the bank is very well-run. U.S. Bancorp doesn’t take much risk, and puts its shareholders first. Third quarter earnings per share (EPS) were in-line with expectations while its revenue beat by $30 million. U.S. Bancorp’s EPS and dividend should trend higher in the coming years as the Federal Reserve normalizes interest rates. Warren Buffett‘s Berkshire Hathaway owned 85.06 million shares of U.S Bancorp as of June 30.

#4 Goldman Sachs Group Inc (NYSE:GS)

Shares held (as of September 30): 251,300
Total Value (as of September 30): $43.67 million
Percent of Portfolio (as of September 30): 11.10%

Goldman Sachs Group Inc (NYSE:GS)’s employees are still the smartest guys in the room. The investment bank has a world-class workforce and is led by one of the best CEO’s in the industry in Lloyd Blankfein. Under Blankfein’s leadership, Goldman Sachs survived the Great Recession while Lehman Brothers and Bear Sterns did not. Now, Goldman Sachs is taking advantage of the M&A boom and printing money for its shareholders again. Shares will do well in the long run as long as the company correctly manages risk and is run for its shareholders. Buffett’s Berkshire Hathaway owned 12.63 million shares of Goldman Sachs as well, as of June 30.

Analysis of Horseman Capital’s top three banking stock picks can be found on the second page.

#3 Bank of New York Mellon Corp (NYSE:BK)

Shares held (as of September 30): 1.22 million
Total Value (as of September 30): $47.63 million
Percent of Portfolio (as of September 30): 12.11%

Bank of New York Mellon Corp (NYSE:BK) is up by 5.46% year-to-date, as the company has beaten analysts’ earnings expectations for three straight quarters. At a forward P/E of 13.62 and with a dividend yield of 1.61%, Bank of New York Mellon Corp is not the cheapest bank in the world, but it is one of the safest. The bank Alexander Hamilton founded has been around for more than 200 years, and will be around for many more if it sticks to its investment management business model. Hedge funds we monitor were bullish on Bank of New York Mellon Corp in the second quarter. A total of 62 funds reported stakes worth $6.49 billion (representing 13.80% of the stock’s float) at the end of June, up from 51 funds and $6.25 billion at the end of March. Nelson Peltz‘s Trian Partners owned 30.23 million shares at the end of the second quarter.

#2 Capital One Financial Corp. (NYSE:COF)

Shares held (as of September 30): 661,700
Total Value (as of September 30): $47.99 million
Percent of Portfolio (as of September 30): 12.20%

Shares of Capital One Financial Corp. (NYSE:COF) are roughly flat year-to-date. On October 22, the company reported third quarter earnings of $1.98 per share on revenues of $5.9 billion, beating estimates by $0.04 per share and $10 million, respectively. Domestic card loans increased by 4% year-over-year to $82.2 billion while period-end loans held for investment rose by 2% to $213.3 billion. With a payout ratio of just 18.1%, Capital One’s dividend yield of 1.97% is safe. Ric Dillon‘s Diamond Hill Capital owned 3.56 million shares of the stock at the end of June.

#1 Wells Fargo & Co (NYSE:WFC)

Shares held (as of September 30): 1.07 million
Total Value (as of September 30): $54.74 million
Percent of Portfolio (as of September 30): 13.92%

It’s not surprising that Wells Fargo & Co (NYSE:WFC) is Horseman Capital’s top holding, good for 13.92% of the fund’s portfolio. Wells Fargo is also Berkshire Hathaway’s top position as of June 30 (as you can see, Buffett also likes banks). Wells Fargo is an favorite of elite funds because it doesn’t take as many risks as other money center banks, and because it earns a nice return on capital, with a return-on-equity of 13.1% and return-on-assets of 1.3%. The bank is expanding this year, having recently acquired several parts of General Electric Company (NYSE:GE)’s GE Capital. With a forward P/E of 12.3 and boasting a dividend yield of 2.74%, shares are attractive.

Disclosure: None