While we don’t recommend blindly following hedge fund activity from 13F filings, we do consider these filings potentially useful for many investors. The most popular small cap stocks among hedge funds, as determined by our analysis, generate an average excess return of 18 percentage points per year (learn more about imitating hedge funds’ small cap picks). We also like to apply traditional stock screens, including the traditional value criteria of low earnings multiples, to lists of individual managers’ top picks so that investors can do further research on any stocks which seem both cheap (by quantitative metrics) and interesting. Read on for our quick take on billionaire Israel Englander’s Millennium Management’s five largest holdings in stocks with both trailing and forward P/Es of 13 or lower, or see the full list of the fund’s stock picks.
Millennium more than doubled the size of its position in chemicals company LyondellBasell Industries NV (NYSE:LYB) to a total of 1.7 million shares. With demand for chemicals being correlated to broader economic activity, LyondellBasell Industries NV (NYSE:LYB)’s beta is 2.5. While the trailing P/E is low in absolute terms at 12, we’d note that the company experienced a 9% decline in revenue last quarter compared to the first quarter of 2012. While analysts expect earnings per share to rise over the next year and a half, we might prefer to look at other chemical companies instead.
National-Oilwell Varco, Inc. (NYSE:NOV) was another of Millennium’s cheap picks with the filing disclosing ownership of 1.2 million shares. The oil and gas equipment and services company is another high-beta stock (specifically, the beta is 2.4) in addition to posting trailing and forward earnings multiples in the 11-12 range. While National-Oilwell Varco, Inc. (NYSE:NOV)’s revenue increased by 23% in its most recent quarter compared to the same period in the previous year, margins shrunk enough to drive a 17% fall on the bottom line and so we’d be a bit worried about its future prospects.
The fund owned almost 6 million shares of McDermott International (NYSE:MDR), a $2.1 billion market cap company which is focused on providing design and construction services in offshore oilfields. Its valuation gives it trailing and forward P/Es of 13 and 10, respectively, as again the sell-side forecasts that the company will recover from recent conditions which caused its earnings to fall considerably from their levels a year ago (even as sales increased). The stock is down 11% in the last year against a rising market, and 11% of the float is held short.
Englander included Phillips 66 (NYSE:PSX) as well as Marathon Petroleum as cheap refining and marketing companies in his portfolio. Phillips 66 (NYSE:PSX) trades at 9 times forward earnings estimates, and while the company’s revenue did decline considerably in the first quarter of 2013 versus a year earlier this was made up for by cost cutting with the result being a doubling of net income. Warren Buffett is a big fan of Phillips 66 (NYSE:PSX): his Berkshire Hathaway reported a position of more than 27 million shares in the stock as of the end of March (find Buffett’s favorite stocks).
We think that refining and marketing looks like a rich hunting ground for value investors, and we’d include both Phillips 66 (NYSE:PSX) and Marathon as well as their peers in that category. We’re more cautious of Lyondellbasell, and of the oil and gas equipment and services companies: their multiples are certainly in value territory, but recent business performance has not been particularly strong. We wouldn’t rule them out, and in particular we do think that the chemical industry is worth investigating, but they do not seem as attractive at this time.
Disclosure: I own no shares of any stocks mentioned in this article.
