ClearBridge’s Top Stock Picks for Early 2016

ClearBridge is a Baltimore-based, long/short equity hedge fund. ClearBridge now contains what was formerly known as Legg Mason Capital Management, which was headed by famous stock picker Bill Miller. However, after Legg Mason Capital Management underperformed the broader market for several years, Mr. Miller stepped down as the firm’s chairman and CIO in 2013 and Legg Mason Capital Management became a part of ClearBridge Investments. Though Mr. Miller is still the portfolio manager of the mutual fund Legg Mason Opportunity Trust, it is not a part of ClearBridge Investments, instead operating under Legg Mason’s subsidiary LMM. Analysis done by Insider Monkey on ClearBridge’s 13F holdings in companies worth at least $1 billion shows that the long positions held by the fund delivered a weighted average returns loss of 2% in 2015. However, the firm’s qualifying long positions did much better in the fourth quarter, posting weighted average returns of 7.9%. Taking that into account, in this post we will analyze the fund’s top five equity holdings going into 2016, as revealed by its recently submitted 13F filing.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012.(see the details here).

#5 Wells Fargo & Co (NYSE:WFC)

– Shares Owned by ClearBridge (as of December 31): 2.65 million

– Value of Holding (as of December 31): $144.27 million

Let’s start with Wells Fargo & Co (NYSE:WFC), in which ClearBridge inched up its stake by 3% during the fourth quarter. After falling below the $50 level earlier this year, shares of Wells Fargo & Co (NYSE:WFC) are finding it hard to climb back above it and currently trade with year-to-date losses of 10.25%. The SEC recently charged the bank with defrauding investors through a $75 million bond offering that it underwrote for the now-bankrupt and defunct video game company 38 Studios in 2010. Some analysts believe there is a possibility that investing legend Warren Buffett could push Wells Fargo & Co and American Express Company (NYSE:AXP) towards a merger soon, as those two companies represent the largest and the fifth-largest equity holdings respectively of his holding company Berkshire Hathaway. At the end of December, Berkshire Hathaway owned nearly 480 million shares of Wells Fargo & Co.

#4 Amazon.com, Inc. (NASDAQ:AMZN)

– Shares Owned by ClearBridge (as of December 31): 238,803

– Value of Holding (as of December 31): $161.4 million

ClearBridge made a wise decision by reducing its stake in Amazon.com, Inc. (NASDAQ:AMZN) by 34% during the fourth quarter, amid a 32% rise in the company’s stock. That’s because Amazon.com, Inc. (NASDAQ:AMZN)’s stock has slumped hard this year, losing over 17% of its value since the beginning of 2016. Though the company delivered worse than expected numbers for its fourth quarter, investors and analysts remain optimistic about its future due to the spectacular growth exhibited by its cloud business, Amazon Web Services. Amazon recently signed a deal with Air Transport Services (NASDAQ:ATSG) under which the latter will be leasing 20 Boeing 767 freight aircraft to the former’s Amazon Fulfillment Services. In addition, Amazon will also hold warrants which will give it the right to acquire up to 19.9% of all outstanding shares of Air Transport Services over a five-year period. On March 10, analysts at Jefferies Group reiterated their ‘Buy’ rating and $775 price target on Amazon’s stock. Billionaire Andreas Halvorsen‘s Viking Global reduced its stake in the company by 15% to 2.56 million shares during the fourth quarter.

#3 Calpine Corporation (NYSE:CPN)

– Shares Owned by ClearBridge (as of December 31): 11.38 million

– Value of Holding (as of December 31): $164.8 million

Though shares of Calpine Corporation (NYSE:CPN) ended the fourth quarter on a flat note, the stock jumped two spots in ClearBridge’s portfolio during the quarter, as the firm increased its stake in the company by 18%. Due to weak power prices and wildfires in California, the power generation company reported a loss of $0.13 per share on revenue of $1.49 billion for the fourth quarter. For the same quarter of the prior year, the company reported EPS of $0.54 on revenue of $1.94 billion. On March 8, analysts at Argus downgraded Calpine Corporation (NYSE:CPN) to ‘Hold’ from ‘Buy’. Siddharth Thacker‘s Signpost Capital held 1.28 million shares of Calpine Corporation as of December 31.

#2 Citigroup Inc (NYSE:C)

– Shares Owned by ClearBridge (as of December 31): 3.4 million

– Value of Holding (as of December 31): $176 million

Citigroup Inc (NYSE:C) continued to remain one of ClearBridge’s five largest equity holdings at the end of December. Though ClearBridge increased its stake in the bank by 3% during the fourth quarter, other hedge funds weren’t quite as bullish, as the overall ownership of the stock among the hedge funds in our database declined by 15 to 106 during the same period. A decline in the broader market coupled with fears of Citigroup Inc (NYSE:C) having high exposure to loans in the energy sector has resulted in the bank’s stock losing 20% of its value since the beginning of 2016. For its fiscal year 2016, Citigroup expects equity trading revenue to fall by 15% and investment banking revenue to decline by 25%. On March 9, analysts at Credit Suisse lowered their price target on the stock to $55 from $57, while keeping their rating on it unchanged at ‘Outperform’. Billionaire Ken Fisher‘s Fisher Asset Management increased its stake in Citigroup by 2% to 12.03 million shares during the fourth quarter.

#1 Microsoft Corporation (NASDAQ:MSFT)

– Shares Owned by ClearBridge (as of December 31): 3.78 million

– Value of Holding (as of December 31): $210 million

Even though ClearBridge reduced its stake in Microsoft Corporation (NASDAQ:MSFT) by 16% during the October-to-December period, the company jumped a spot in the fund’s equity portfolio to become its largest equity holding at the end of December. After rising by almost 25% during the final quarter of 2015, shares of Microsoft Corporation (NASDAQ:MSFT) have fallen by over 6% so far this year. Nevertheless, most analysts feel that the company is one of the best bets that investors can make in the technology sector right now, as it is relatively stable financially, sports an annual dividend yield of almost 3% and has a cloud platform, Azure, that is growing at an exponential rate. During the fourth quarter of 2015, Amazon’s AWS maintained its position as the leader in the cloud space with over 30% market share, however, it was Microsoft Corporation’s Azure which saw the top year-over-year growth during the period, at 124%. Donald Yacktman‘s Yacktman Asset Management reduced its holding in Microsoft by one-fourth to 12.93 million shares during the fourth quarter.

Conclusion: None