Bill Miller and Legg Mason Sticking with Apple Inc. (AAPL), Bullish on McDonald’s Corporation (MCD)

At Insider Monkey, we’ve recently teamed up with MarketWatch to create the Billionaire Hedge Fund Index, which returned 24.3% last year, outpacing the S&P 500 index by 8 percentage points. The purpose of this index is to demonstrate the mammoth potential of that top-tier hedge funds’ best picks have, and we use other variants of this market-beating strategy as well (see how to capitalize on them yourself).

With that being said, it’s important to do a fund-by-fund analysis of the smart money, and one hedgie who definitely qualifies in this group, and is one of the 450 funds we track, is Bill Miller’s Legg Mason Capital Management. Miller’s equity portfolio—as compiled by 13F filings from the SEC—indicates that he was making a few intriguing bets to prepare for 2013. Let’s take a look at what his top five stock picks were at the end of the fourth quarter.

Apple Inc. (NASDAQ:AAPL) has been Miller’s top stock pick for six consecutive quarters, and despite the company’s selloff in Q4—its shares lost more than 20% over this time—the hedge fund manager has remained confident in Cupertino. On the whole, Apple Inc. (NASDAQ:AAPL) saw 15% of the 158 hedge funds that were long in Q3 sell out one quarter later, so Miller’s conviction is all the more important.

Since the start of 2013, Apple’s stock price is down another 16.2%, but as all value-seeking investors are likely aware of, Mr. Market is severely undervaluing its growth prospects. On a price-earnings growth basis, Apple Inc. (NASDAQ:AAPL)  is the third cheapest out of the S&P 500’s 74-stock technology sector with a PEG of 0.53. The company also sports the third best five-year expected annual EPS growth rate (18.9%), and its dividend yield near 2.4% places it in the upper third of its peers.

There’s something here for literally investors of all philosophies, and talk of more value-creation is yet another reason to be bullish on Apple Inc. (NASDAQ:AAPL).

JPMorgan Chase & Co. (NYSE:JPM) has been Miller and Legg Mason’s second largest equity holding for the past two quarters. JPMorgan’s stock has already popped close to 10% year-to-date, and Wall Street’s average price target still represents an upside of another 10% or so. Like Apple, there are many quantitative reasons to like this banking giant, from its 2.5% dividend yield to its valuation that’s below parity with its book value. Joining Miller in JPMorgan at the end of Q4 was a host of prominent hedgies, including Cliff Asness, George Soros, David Tepper and Ken Griffin, to name a few.

Ford Motor Company (NYSE:F) and McDonald’s Corporation (NYSE:MCD) are newcomers to Legg Mason’s “fab five,” and each saw the hedge fund up its stake last quarter. Ford received a modest 3% boost while Miller increased his position in McDonald’s by an astounding 559%—he’s not the only manager that has been supersizing this stock.

How was the rest of the hedge fund industry treating MCD last quarter?

On the whole, of the 450 hedge funds we track, McDonald’s was also the most loved company in the restaurant industry, with 47 funds reporting long positions. Ford, meanwhile, was the hedge fund industry’s second favorite auto manufacturer with support from 58 funds, second to General Motors’s whopping total of 98.

Both of these companies operate in generally bullish macroeconomic environments; offer double-digit EPS growth potential at a fairly reasonable price, and the proverbial cherry is that each pays a dividend yield in excess of 3.2%. It’s obvious that Miller and Legg Mason love these types of stocks—that appeal to a broad investor base—and it’s difficult to argue with their sentiment.

Chevron Corporation (NYSE:CVX), lastly, rounds out this top five, and represents a similar high-income, low-valuation play as the rest of its aforementioned portfolio peers. Analysts’ average price target on the integrated oil and gas behemoth indicates that 9-10% upside is expected, and shares have already cracked the double-digit return mark over the past three months. Ken Fisher, D.E. Shaw and Ray Dalio (see Dalio and Bridgewater’s full equity portfolio) were all upping their stakes in Chevron last quarter, and it’s difficult to argue with this consensus.