By studying quarterly 13F filings from hedge funds, 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 (read more about our small cap strategy). We also think that studying 13F filings can be advantageous to investors who are looking for stock ideas for further research, since they can be taken as a list of stock picks from top managers. Cliff Asness founded AQR Capital Management in 1997 after earning a Ph.D. in finance and working at Goldman Sachs Asset Management. Read on for our quick take on AQR’s five largest holdings by market value or see the full list of Asness’s stock picks.
Apple Inc. (NASDAQ:AAPL) may have lost its place as the most popular stock among hedge funds during the fourth quarter of 2012 (AIG is the new most popular stock), but AQR actually increased its position slightly to a total of about 520,000 shares. Pessimism about Apple Inc. (NASDAQ:AAPL)’s margins have driven the stock down to a trailing price-to-earnings ratio of 10. While we do expect much lower earnings than the sell-side (whose estimates imply a five-year PEG ratio of 0.5), we would say that Apple Inc. (NASDAQ:AAPL) is undervalued at its current price particularly given potential uses of its cash.
AQR reported a position of 4.4 million shares in JPMorgan Chase & Co. (NYSE:JPM). JPMorgan Chase is another megacap stock with low earnings multiples- for example, it is valued at 9 times trailing earnings- and the book value of its equity is actually slightly higher than the current market cap as well. While some other large banks such as Citigroup Inc. (NYSE:C) carry even higher discounts to book value, we think that they also tend to be higher risk in terms of macro factors and less reliable in terms of asset quality. Billionaire Ken Fisher’s Fisher Asset Management owned about 12 million shares of JPMorgan Chase at the end of December (research more stocks Fisher owned).
The fund had Chevron Corporation (NYSE:CVX) in its portfolio as a complementary oil major to Exxon Mobil. Chevron trades at 9 times expected earnings for 2014, and its earnings were actually up considerably in the fourth quarter of 2012 versus a year earlier- though revenues fell 4%. As a result it’s possible that it’s worth paying the small premium to own Exxon Mobil instead. D.E. Shaw, a large hedge fund named after billionaire founder David Shaw, increased its position in Chevron by 88% between October and December to end 2012 with 1.1 million shares in its portfolio (check out more stocks D.E. Shaw was buying).
AT&T Inc. (NYSE:T) rounded out Asness’s top five picks as the 13F disclosed a position of 5.3 million shares. AT&T is a popular income stock, as it pays a dividend yield of 5% going by the current stock price and recent dividend payments and also has low market exposure with a beta of 0.4. Of course, the flipside to this much stability is not having many growth prospects and the company’s revenue growth has been quite low. Columbus Circle Investors, managed by Donald Chiboucis, was another major holder of AT&T.
Disclosure: I own no shares of any stocks mentioned in this article.
