We track quarterly 13F filings from hundreds of hedge funds, including billionaire and Tiger Cub Stephen Mandel’s Lone Pine Capital. There are multiple ways for investors to use the information in 13Fs. For one, we have 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 (and think that more strategies are possible as well). We can also compare an individual fund’s most recent filing to the previous one in order to identify new picks in its portfolio over the course of that quarter. Read on for our thoughts on five of Lone Pine’s largest new holdings for the first quarter of 2013 and review Mandel’s previous filings.
The fund bought 4.9 million shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) between January and March after not having owned any shares of the $28 billion market cap pharmaceutical company at the beginning of the year. Valeant’s stock price is up over 90% in the last year, and while this has slightly outpaced the business’s growth revenue was up 25% last quarter compared to the first quarter of 2012. Viking Global, managed by fellow Tiger Cub and billionaire Andreas Halvorsen, increased its stake in Valeant by 28% to a total of nearly 5 million shares (see Halvorsen’s stock picks).
Mandel and his team initiated a position of 5.7 million shares in Virgin Media Inc. (NASDAQ:VMED); the company is currently in the process of being acquired by Liberty Global Inc. (NASDAQ:LBTYA). Merger arbitrage is a common hedge fund strategy, as the returns depend on whether or not the deal closes rather than on market conditions (as such, returns tend to be uncorrelated with market indices). Read more about investing in merger arbitrage plays. Returns on buying acquisition targets do tend to be low in absolute terms, but often look better when annualized and hedge funds can generally use high leverage as well.
Thermo Fisher Scientific Inc. (NYSE:TMO) was another of Lone Pine’s new stock picks. The medical instruments and equipment company grew its net income by 21% in the first quarter of 2013 versus a year earlier, though revenue was up only 4% and so we’d be concerned as to how sustainable this recent earnings growth actually is. The market is currently pricing in high growth going forward, with a trailing P/E of 26. Billionaire Dan Loeb’s Third Point also took a new position in Thermo Fisher in the first quarter of 2013 (research more stocks Loeb has been buying).
The filing disclosed ownership of 3.5 million shares of CME Group Inc (NASDAQ:CME), which operates futures exchanges. The stock carries trailing and forward P/Es of 26 and 19, respectively, but business has actually been down in contrast to the growth implied in this valuation. CME does pay a dividend yield of nearly 3% at current prices and dividend levels; still, we’d avoid the stock at least until it managed to deliver improvements on its bottom line. Citadel Investment Group was also buying CME during Q1, closing March with 1.1 million shares in its portfolio; that fund is managed by billionaire Ken Griffin (find Griffin’s favorite stocks).
Lone Pine owned 6.8 million shares of H&R Block, Inc. (NYSE:HRB), which has soared over 90% in the last year. Wall Street analysts are expecting $2.60 in EPS for its fiscal Q4, which ended in April (the company is often unprofitable the other three quarters of the fiscal year). Even with the sell-side forecasting considerable increases in earnings per share both for that quarter and over the next fiscal year, H&R Block is valued at 16 times forward earnings estimates, meaning it would need more growth beyond that point to justify the current valuation. Julian Robertson– the mentor of the Tiger Cubs- included H&R Block among his top picks according to his own 13F.
Disclosure: I own no shares of any stocks mentioned in this article.
