In May, billionaire Louis Bacon’s Moore Global filed its 13F with the SEC for the first quarter of 2013. We don’t recommend blindly following hedge funds’ picks, among other reasons because the information is often out of date by the time it is released to the public, but there are a few techniques investors can use to take advantage of the included information. For one, we’ve found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year. We also think that hedge fund managers’ picks can be screen according to a variety of criteria, including low price-to-earnings multiples, to generate initial investment ideas and allow investors to further research any interesting names. Read on for our thoughts on the fund’s five largest positions in stocks with both trailing and forward P/Es of 13 or less (or see the full list of Bacon’s stock picks).
Moore Global increased the size of its position in Assured Guaranty Ltd. (NYSE:AGO) by 43% during the first quarter of this year, making the $4.2 billion market cap insurer of public finance and infrastructure bonds one of the fund’s largest holdings. Assured Guaranty is cheap in terms of its earnings- for example, the trailing earnings multiple is only 9- and compared to the book value of its assets (the P/B ratio is 0.9). The stock price is highly correlated to the broader economy- the beta is 2.0- but it is still interesting at these valuation metrics.
Bacon and his team were buying International Business Machines Corp. (NYSE:IBM) between January and March, closing Q1 with 350,000 shares in their portfolio. The trailing and forward P/Es are 13 and 11, respectively, but the business appears to be struggling with changes in the technology environment: in the first quarter of 2013, revenue fell by 5% versus a year earlier with earnings down as well. We suppose IBM could improve EPS through share buybacks, as cash flow is quite high, though we’d generally prefer that value ideas be recording increases in revenue and net income.
The filing had Moore initiating a position of about 2.3 million shares in Dell Inc. (NASDAQ:DELL). Dell is currently a battleground between billionaire activist Carl Icahn and a consortium of private investors led by Silver Lake (who have founder Michael Dell’s support). Icahn appears able to finance his higher bid for the company, which has recently led the Board of Directors to ask the Silver Lake/Dell group to raise their bid in order to remain competitive. At the current price- a small discount to the proposed transaction prices- the trailing P/E is 13 though Dell’s business has been struggling.
Rounding out our list of Bacon’s cheap picks is Discover Financial Services (NYSE:DFS). Discover is valued at 11 times its trailing earnings, even though in its most recent quarterly report it showed small increases in revenue and earnings compared to the first three months of 2012 (the company recently changed its fiscal year to the calendar year). With the company buying back shares, EPS increased at an even higher rate. Given the combination of stable to growing financials and a low valuation, we think Discover is a potential value stock.
We generally think that these financial picks from Moore Global’s portfolio look interesting in value terms, and would be interested in learning more about the companies. IBM, however, would have to report better numbers before we’d fell comfortable considering it and Dell will of course only be of interest to investors interested in merger arbitrage opportunities.
Disclosure: I own no shares of any stocks mentioned in this article.
