Apple Inc. (NASDAQ:AAPL) and American International Group Inc (NYSE:AIG) are the smart money’s top two equity investments, according to our database of consensus filings from the end of the fourth quarter. Let’s take a look at one fund that was invested in both companies heading into 2013.
Hedge funds have their fair share of critics. At Insider Monkey, though, we track 450 of the world’s most elite money managers, and by focusing on their best stock picks, we’ve found some strategies that have historically performed very well against Mr. Market. For more than a decade in our back tests, our small-cap strategy beat the market by 18% a year, and since we’ve started sharing these picks with the public, it has outpaced the S&P 500 by more than 20% (learn how to use this strategy yourself).
With this in mind, it’s also important to take a look at individual positions inside each hedge fund’s portfolio, and one fund we haven’t analyzed yet is Brian Jackelow’s SAB Capital. Jackelow’s top three positions comprise almost 50% of his entire equity portfolio, so let’s take a look at this group, starting with No. 1.
Apple Inc. (NASDAQ:AAPL) is the top stock pick in Jackelow’s entire equity portfolio, and against the wisdom of many of his peers, he actually established his position in the tech giant last quarter. Now, this is important because on the whole, aggregate hedge fund interest in Apple Inc. (NASDAQ:AAPL) fell by 15% in Q4, as many managers were either slashing or cutting their stakes entirely. Still, there was a select group of hedgies that used this period to buy when everyone else was selling, including Christian Leone (see Leone’s top picks), Louis Bacon and Larry Robbins in addition to Jackelow.
Clearly, a reason behind any Apple-bull’s sentiment is tied to the company’s bargain bin valuation–shares trade at a PEG near 0.5 and a forward earnings multiple below 9.0x. Key peers Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT), meanwhile, trade at a premium of more than 250% to Apple’s earnings growth multiple.
Aside from this attractive price, a dividend yield near 2.5% has undoubtedly brought some income-seeking investors into the fold, but an underrated aspect of Apple Inc. (NASDAQ:AAPL)’s future lies in its growth prospects. Yes, EPS growth is decelerating, but Wall Street’s five-year annual forecast (19.0%) is above peers like Google (14.4%) and Microsoft (8.4%) quite handily. Shares haven’t had a good 2013, but it’s worth noting that the average analyst’s price target represents a 43% upside from current levels, more than the appreciation that’s expected of Google (+1.5%) and Microsoft (+16.2%).
Post-bailout, investors have been particularly kind to American International Group Inc (NYSE:AIG)–shares are up more than 15% since the beginning of last December–and there’s still plenty here for value-oriented investors.
How exactly is this the case?
Shares currently trade at a 42% discount to book value parity, and over the shorter term, the Street predicts an upside of nearly 11% from current levels. There’s not much here to dislike about AIG, and hedge funds’ conviction should be taken seriously.
Two Harbors Investment Corp (NYSE:TWO) rounds out this trio, as it has for three consecutive quarters. A new position for Jackelow back in Q3 2011, the residential-focused REIT lies 18th of 144 when we rank this industry by hedge fund interest. Coincidentally, 18 of the hedgies we track were bullish on Two Harbors at the end of Q4, including Steven Cohen, David Tepper and George Soros, but it’s worth noting that Jackelow’s $90 million position was the largest, trumping his next closest peer by a factor of 2 to 1.
Now, to call Jackelow the poster boy for Two Harbors would be a stretch, but it’s an important point to make that shares have risen by more than 40% since the start of 2012, rewarding the hedge fund manager’s investment quite nicely. Despite its solid appreciation, this REIT still sports a price-to-book valuation of 1.12, which is a 44% discount to industry norms. A projected dividend yield above 17% is also tops in the entire REIT space, in terms of both residential and diversified operators.
In short, it looks like Two Harbors is quite the “Income at a Reasonable Price” play. Yes, the term doesn’t get thrown around much–if ever–but with the dividend and value that this REIT provides, we may have to start.
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