There are thousands of hedge funds operating in the financial world, and while their returns have been less than stellar, top-tier managers can still beat the market. This is why we, at Insider Monkey, teamed up with MarketWatch to create the Billionaire Hedge Fund Index, which returned 24.3% last year, beating the S&P 500 ETF by 8 percentage points. We’ve also discovered that historically, retail investors have been able to beat the market by following hedge funds’ consensus small-cap picks (see how to use these strategies yourself).
While it’s easy to focus on the Buffetts and Einhorns of this space, we also must take a look at the holdings of some lesser known, equally as successful hedge funds. One such fund that comes to mind is Phill Gross and Robert Atchinson’s Adage Capital Management, which has amassed a mammoth multi-billion dollar equity portfolio. Using the latest round of fourth quarter 13F filings from the SEC, we’re going to take a look at what this duo’s top five stock picks were on the eve of 2013.
Apple Inc. (NASDAQ:AAPL) has been displaced by AIG as the smart money’s favorite stock, which was part of a broader trend among the elite managers that saw big-time tech players being replaced by discounted financial stocks. Adage Capital, however, has bucked this trend, choosing to stick with Apple as its No. 1 stock pick, at least at the end of last quarter. Year-to-date, Apple shares have continued to underperform, though they’re still attractive from a valuation, income and growth standpoint.
See, many pundits are aware that Apple sports cheap multiples, and they probably even realize that its dividend yield above 2.3% places it in the upper-third of the technology sector. Unbeknownst to most bulls, though, is that EPS growth is still expected to average almost 19% a year over the next-half decade; this places Apple as 3rd out of 74 S&P 500-listed tech stocks. Thus, growth-oriented investors can still be satisfied with this stock, which is an important point worth making.
Exxon Mobil Corporation (NYSE:XOM) sits at the No. 2 spot in Gross and Atchinson’s equity portfolio, and like Apple, it is a fairly cheap mega-cap with an adequate dividend yield. Shares of this oil and gas behemoth have been rather stagnant over the past 3-month (0.6%), 6-month (1.3%) and 12-month (3.5%) periods, though Wall Street’s average price target still predicts a 6-7% upside from current levels. Joining Adage Capital in Exxon is prominent peers like Murray Stahl, Chuck Royce and Ray Dalio, and on the whole, 54 of the hedge funds we track were bullish in Q4—the most in the integrated oil and gas industry.
Who’s the best of the rest?
Honeywell International Inc. (NYSE:HON), meanwhile, was the six largest holding in Adage’s Q3 13F filing, and one quarter later, the fund upped its stake by 10%, moving it to the No. 3 spot. Honeywell has already returned close to double-digit percentage points since the start of 2013, outperforming the technology sector handily (~4%). Honeywell has a major footprint in the aerospace industry, and its products serve everything from commercial jets to helicopters.
Broadly focused cost-cutting has led to sold margin expansion of late, and although shares aren’t particularly cheap, four consecutive earnings beats lends credence to the theory that this stock should continue to serve as a nice momentum play. Honeywell reports its first quarter financials in mid-April, so we’ll be watching this date closely.
Last but certainly not least, Philip Morris International Inc. (NYSE:PM) and Potash Corp./Saskatchewan (USA) (NYSE:POT) sit at the No.’s 4 and 5 spots in Gross and Atchinson’s equity portfolio. While both companies operate in drastically different industries, each represents a solid play for its own reasons.
Philip Morris’s position as the world’s largest tobacco company gives it significant scale advantages over its peers, and the sell-side expects the steady, plodding growth of yesteryear to continue into the intermediate future. Forecasts predict annual EPS expansion of 11-12% through at least 2017.
Potash, on the other hand, offers a slightly less glamorous dividend than Philip Morris’s yield of 3.6%, but like its portfolio peer, analysts expect double-digit expansion over the next year. Longer-term predictions are less certain, though, as the world’s largest potash producer must capitalize on emerging market demand, which is a higher growth area of the global economy.
With this analysis in mind, it’s easy to see that Phill Gross and Robert Atchinson have a penchant for industry leaders that offer at least two of the following: value, income or momentum. Aside from this particular market-beating strategy, ardent investors would be wise to consider these types of plays when compiling their portfolios for the remainder of the year.
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