5 Top Stock Ideas For Q4 From Dalton Investments

Gifford Combs‘ Dalton Investments is a savvy firm. AsiaHedge named Combs’ fund the Management Firm of the Year in 2012 for having the best risk-adjusted returns among its peers. Given that Dalton Investments recently filed its 13F for the third quarter reporting period, let’s take a closer look at the firm’s top picks heading into the fourth quarter, which are Berkshire Hathaway Inc. (NYSE:BRK.B), Micron Technology, Inc. (NASDAQ:MU), Turquoise Hill Resources Ltd (NYSE:TRQ), Eros International plc (NYSE:EROS), and American International Group Inc (NYSE:AIG).

First a little about ourselves. We at Insider Monkey track smart money investing activity. Why do we pay attention to 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 has 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 American International Group Inc (NYSE:AIG)

Shares held (as of September 30): 205,852
Total Value (as of September 30): $11.7 million
Percent of Portfolio (as of September 30): 5.89%

American International Group Inc (NYSE:AIG) has come a long way from the great recession. After paying off the government and divesting various non-core assets, American International Group is now solidly profitable. Given the strong U.S economy and soon-to-be normalizing interest rates, profits should rise as the insurer realizes more returns on its investments. Given the better times, American International Group could use its added cash flow to buy back shares on the cheap. Despite the 10.41% year-to-date rally, American International Group trades for only 0.78-times book value. John Paulson‘s Paulson & Co and Bruce Berkowitz’s Fairholme were among the elite investment firms long AIG at the end of the second quarter.

#4 Eros International plc (NYSE:EROS)

Shares held (as of September 30): 859,054
Total Value (as of September 30): $23.36 million
Percent of Portfolio (as of September 30): 11.76%

Eros International plc (NYSE:EROS), a leading company in the Indian film entertainment industry, is down by 30.77% year-to-date on accounting concerns. Wells Fargo analyst Eric Katz said, “we still don’t know the largest content buyers driving this increase, and we aren’t fully comfortable with the fact nearly half of the revenue originates outside of India”. The company needs to do a better job being transparent with its revenue streams. Investors are unlikely to get excited about the stock until the company clears the air over the issue.

#3 Turquoise Hill Resources Ltd (NYSE:TRQ)

Shares held (as of September 30): 11.62 million
Total Value (as of September 30): $29.64 million
Percent of Portfolio (as of September 30): 14.92%

Turquoise Hill Resources Ltd (NYSE:TRQ) is down by 2.26% year-to-date as lower commodity prices weigh on the company’s bottom line. The Chinese economy is slowing and reducing demand for the gold and copper that Turquoise Hill Resources Ltd produces in its giant Oyu Tolgoi mine in Mongolia. Demand for commodities will eventually bounce back, although Turquoise Hill Resources Ltd might not be around that long, however, as CIBC World Markets analyst Tom Meyer thinks Rio Tinto plc (ADR) (NYSE:RIO) will ‘almost certainly’ acquire 100% of the company one day. The question is when and at what price. Rio Tinto currently owns more than half of the company.

#2 Micron Technology, Inc. (NASDAQ:MU)

Shares held (as of September 30): 2.25 million
Total Value (as of September 30): $33.68 million
Percent of Portfolio (as of September 30): 16.95%

Micron Technology, Inc. (NASDAQ:MU) is off by 50.76% year-to-date as investors worried about industry oversupply and lower pricing. Investors also worried about PC’s secular decline, as research firm IDC expects worldwide PC shipments to fall by 8.7% in 2015 and ‘not stabilize until 2017’. Still, given the sector is consolidating and the oversupply problem will improve as companies cut back production, Micron shares offer great long-term value, as evidenced by Tsinghua Unigroup’s offer for Micron which was dismissed as untenable due to national security concerns. David Einhorn‘s Greenlight Capital, which owned some Micron shares at the end of June, had this to say about the company:

“With only three remaining players, the industry is behaving more rationally. Manufacturers are redirecting capacity away from computer DRAM to other segments, and we believe that the excess computer DRAM inventory created earlier this year is now being absorbed. Our assessment is that MU shares have fallen too far. Peak quarterly earnings last year were $1.04 and we expect the cyclical trough to be around $0.40 in the August quarter.”

At 7.5-times forward earnings, shares look cheap.

#1 Berkshire Hathaway Inc. (NYSE:BRK.B)

Shares held (as of September 30): 331,161
Total Value (as of September 30): $43.18 million
Percent of Portfolio (as of September 30): 21.73%

Berkshire Hathaway Inc. (NYSE:BRK.B) shares might be down by 8.5% year-to-date, but Warren Buffett is still the greatest investor of all time. His various lovingly-curated businesses will still outperform the market in bad times and will do almost as well in good times. Each Berkshire division has a wide moat, earns attractive returns on equity, and is run by capable managers. Although the divisions don’t have as many synergies among them as they could, the divisions are the leaders in their respective fields. With a forward P/E of 16.77 and interest rates soon to rise, Berkshire Hathaway is a great long-term investment.

Disclosure: None