Bourgeon Capital Loves These Five Stocks. Should You?

John A. Zaro, a Stanford graduate and a member of the New York Society of Security Analysts, founded Bourgeon Capital in 1999. Michael Keohane joined the fund in 2002 from SAC Capital to co-manage Bourgeon’s long/short hedge fund. The pair have done very well since then, by investing in quality companies and practicing solid risk management. Given that Bourgeon Capital recently disclosed its public equity portfolio in a 13F filing with the SEC, let’s take a closer look at Bourgeon Capital’s top picks of Plum Creek Timber Co. Inc. (NYSE:PCL), JPMorgan Chase & Co. (NYSE:JPM), Merck & Co., Inc. (NYSE:MRK),Schlumberger Limited. (NYSE:SLB), and Cisco Systems, Inc. (NASDAQ:CSCO).

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Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 53 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. a 48.7% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

#5 Cisco Systems, Inc. (NASDAQ:CSCO)

Shares held (as of September 30): 166,700
Total Value (as of September 30): $4.38 million
Percent of Portfolio (as of September 30): 3.06%

Bourgeon Capital increased its position in Cisco Systems, Inc. (NASDAQ:CSCO) by 31% in the third quarter to 166,700 shares, as Cisco’s stock remains cheap, with a forward P/E of 11.66 versus the NASDAQ’s forward P/E of 19.85. Given Cisco’s growth opportunities in the internet of things, analysts are bullish, as 22 analysts have a ‘Buy’ rating, while just three have a ‘Sell’ rating, and nine have a ‘Hold’ rating. Overall, analysts have a consensus price target of $32.40 per share, suggesting upside of 13.24% on shares. Donald Yacktman‘s Yacktman Asset Management owned 42.1 million Cisco shares at the end of June.

#4 Merck & Co., Inc. (NYSE:MRK)

Shares held (as of September 30): 89,450
Total Value (as of September 30): $4.42 million
Percent of Portfolio (as of September 30): 3.08%

Bourgeon Capital upped its holding in Merck & Co., Inc. (NYSE:MRK) by 72% to 89,450 shares, good for 3.08% of the fund’s equity portfolio. The drug giant reported solid third quarter results, with earnings per share of $0.96 on revenues of $10.07 billion, beating earnings estimates by $0.04 per share and meeting revenue estimates. Guidance was pretty solid as well, with management expecting 2015 EPS of $1.64-to-$1.74, up from the previous $1.52-to-$1.71, along with 2015 revenues guidance of $39.2 billion-to-$39.8 billion, up on the lower end from the previous guidance of $38.3 billion-to-$39.8 billion. Given the forward P/E of 14.6 and dividend yield of 3.27%, shares look attractive for long-term shareholders.

Bourgeon Capital’s three most-loved stocks are looked at on the next page.

#3 Plum Creek Timber Co. Inc. (NYSE:PCL)

Shares held (as of September 30): 113,220
Total Value (as of September 30): $4.47 million
Percent of Portfolio (as of September 30): 3.12%

Analysts are bullish on REIT Plum Creek Timber Co. Inc. (NYSE:PCL), as four analysts covering the stock have a ‘Buy’ rating, while one has a ‘Sell’ rating, and one has a ‘Hold’ rating. Some hedge funds are also bullish, as 14 funds out of the 730 that we follow owned $571.16 million worth of the company’s shares on June 30, with Jim Simons‘ Renaissance Technologies owning 685,900 shares. Shares pay a nice 4.27% dividend yield, although the REIT may have to pay more if interest rates begin moving up.

#2 Schlumberger Limited. (NYSE:SLB)

Shares held (as of September 30): 69,325
Total Value (as of September 30): $4.78 million
Percent of Portfolio (as of September 30): 3.34%

Bourgeon Capital is buying the dip on Schlumberger Limited. (NYSE:SLB), as the fund increased its holding by 30% to 69,325 shares in the third quarter. The oil service giant has had a rare down year, as Brent prices are half of what they were in the middle of 2014 due to a weak Chinese economy and increased OPEC production. Despite the low energy prices, Schlumberger is still profitable, with third quarter earnings per share of $0.78 on revenues of $8.47 billion, down by 33% year-over-year. Schlumberger’s management is adjusting to the oil slump by cutting costs and taken advantage of deflated valuations by acquiring fellow oil service provider Cameron International Corporation (NYSE:CAM) in an accretive $14.8 billion deal. Ken Fisher‘s Fisher Asset Management owned 4.19 million shares of Schlumberger at the end of September.

#1 JPMorgan Chase & Co. (NYSE:JPM)

Shares held (as of September 30): 97,367
Total Value (as of September 30): $5.94 million
Percent of Portfolio (as of September 30): 4.14%

Although shares retraced substantially in August on concerns that a China slowdown would cause a global recession, shares of JPMorgan Chase & Co. (NYSE:JPM) have rebounded strongly since. Given the Shanghai index has stabilized, the market no longer believes China’s economy is in danger of a sharp slowdown that could cause a global recession. That’s good news for JPMorgan shareholders, as a lower probability of a recession means lower charge-offs and higher earnings per share. A healthier Chinese economy also allows the Federal Reserve to raise rates faster, an action that will increase JPMorgan’s return on equity. Fisher Asset Management was also high on JPMorgan, owning 13.82 million shares of it at the end of September.

Disclosure: None