We track 450 of the world’s most elite hedge fund managers and our research has shown that over time, their best picks routinely outperform. For more than a decade in our back tests, our strategy beat the market by 18 percentage points a year, and since we’ve started sharing these picks with the public, it has outpaced the S&P 500 by more than 20 percentage points (learn how to use this strategy yourself).
Furthermore, it’s crucial to look at each of the funds we monitor individually, and by using the latest round of fourth quarter 13F data from the SEC, we can determine how hedgies were preparing for 2013.
One of these funds in particular is Second Curve Capital, run by Tom Brown, a former banking analyst who was with Smith Barney and Paine Webber before heading the financial services group of Tiger Management. Brown is considered to be one of the leading experts on financial stocks and his fund offers few surprises. Let’s take a look at his top five stock picks.
Topping the list at number one is Newstar Financial Inc (NASDAQ:NEWS). Since the start of the year, Newstar was outperforming the NASDAQ, but has started to lag, despite what appears to be a relatively bullish earnings report, where earnings per share increased to $0.45 from $0.27 from one year earlier. This stock’s longer-term trend looks bullish despite recent profit taking off the $14.50 level, and given Brown’s aptitude in picking financial stocks, he is most likely considering a longer time horizon with the fairly valued commercial finance company. Newstar sports a PEG of 1.18 and trades at a mere 2.84 times its cash per share. Hedge fund titans Cliff Asness and Jim Simons also hold smaller positions in Newstar; see the details here.
A new addition to Brown’s holdings is Bank of America Corp (NYSE:BAC), number two in this top five. Bank of America rallied in heavy trading last week following the results of the Federal Reserve’s “stress test,” which assessed each bank’s ability to weather another crisis similar to that of 2008-2009.
Rising home sales and the subsequent need for financing is also giving Bank of America Corp (NYSE:BAC) a boost, however, the stock continues to struggle above the $12 mark. Most analysts are recommending a hold due to sluggish revenue growth, as the bank continues to digest its past acquisitions of Countrywide and Merrill Lynch made several years ago.
Number three on this list is Taylor Capital Group Inc (NASDAQ:TAYC). Of all the hedge funds that Insider Monkey follows, Second Curve is the only one who holds a sizable position in Taylor Capital; the other two funds, Wexford Capital and Renaissance Technologies, have less than a 1% stake in Taylor Capital Group Inc (NASDAQ:TAYC). This might be one of those stocks where Brown sees value where others don’t. Taylor has put in a very poor performance in 2013 thus far, down 10% from the start of the year and has been trading inversely to the Dow and S&P 500 since the end of 2012. All indications suggest that disappointing financials reported in February, in which sales and operating profits were up, but…
…net income was down due to increased tax expenses, might be responsible. Nonetheless, Brown increased his position in Taylor Capital by 7% in Q4 according to his latest 13F filing, and given his expertise in the banking sector, it’s an intriguing contrarian play.
Coming in fourth is The Bancorp, Inc. (NASDAQ:TBBK), and while the choice of Taylor Capital Group in Brown’s portfolio may leave some scratching their heads, Bancorp appears to be a no-brainer. The stock enjoys a trifecta of bullish indicators: (1) technicals are strong, (2) net income has increased fourfold over the past three years, and (3) earnings are up from the year prior. There are a few caveats, however, in regard to Bancorp, like its price-to-book of 1.6, 60% higher than its industry’s average. The stock’s earnings multiple is even more overvalued, at more than twice that of the banking sector’s norms. Still, all in all, Bancorp is a keeper from a momentum standpoint, and it’s no wonder Brown upped his position by 11% in Q4.
Lastly, at number five is Primus Guaranty, Ltd. (PINK:PRSG). Since the company decided to de-list from the NYSE in 2011 in an effort to cut expenses, the stock has moved consistently higher from a $4.20 low in late 2011 to a $9.72 high in recent weeks. Things seem to have leveled off, however, since the release of FY2012 earnings, which fell by 39% from one year earlier. Brown and Second Curve cut their exposure to Primus by 14% in the fourth quarter, making it the only stock in Brown’s top five that he was bearish on.
History proves that Brown’s expertise in financial stocks is unrivaled and it’s said that he turned a $130,000 investment by his father into $18 million by 2003. We’re not sure if any of these picks can generate quite that return, but it’s worth paying attention to this hedgie nonetheless.
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