13F filings are rolling in for the end of December 2012; these filings disclose many of a hedge fund or other major investor’s long equity positions as of the end of the quarter, which in this case provide a picture of what fund managers liked going into 2013. There are multiple ways for investors to use these filings. We like to aggregate them into a database and then find the most popular stocks among hedge funds; the stocks we named as the most popular small cap picks in our August newsletter produced an excess return of 18 percentage points between September and January (read more about our hedge fund strategies). Another tool is to go fund by fund and see what stocks that manager would “recommend” to you- for free- and then do a quick pass looking at the company. Iridian Asset Management, a fund managed by David Cohen and Harold Levy, has filed its 13F for Q4. Read on to see what we think of its top picks and compare them to previous filings.
Eastman Chemical Company (NYSE:EMN) was Iridian’s largest holding by market value as the fund reported a position of 4.4 million shares. While Eastman’s revenue was up 26% in the fourth quarter of 2012 compared to the same period in the previous year, net income has been low on a trailing basis and the trailing P/E is 25. Wall Street analysts expect considerably higher earnings over the next couple years, and so the forward P/E is only 10, but we would still be cautious. Viking Global, managed by Tiger Cub Andreas Halvorsen, had reported owning over 6 million shares at the end of September (see Halvorsen’s stock picks).
The fund owned 5.1 million shares of Wyndham Worldwide Corporation (NYSE:WYN), up slightly from three months earlier. The $7.8 billion hotels and hospitality company is another whose recent performance has not been particularly strong- in its most recent quarterly report, earnings were down slightly from a year earlier- and that isn’t a positive with the stock trading at 22 times trailing earnings. Growth estimates from the sell-side are high enough for a five-year PEG ratio of 1. Billionaire Stephen Mandel’s Lone Pine Capital had 5.9 million shares in its portfolio at the end of the third quarter (find Mandel’s favorite stocks).
See three more of Iridian’s top picks:
Pharmacy services company Omnicare, Inc. (NYSE:OCR), which focuses on providing pharmacy access to long-term care and assisted living facilities, was another of Iridian’s largest holdings despite a moderate sale of shares in Q4. First Pacific Advisors, which is co-managed by Robert Rodriguez and Stephen Romick, is another major shareholder in Omnicare. Here, the company’s earnings have actually been up but quite a bit of future growth is priced in to the stock at a trailing P/E of 27. The most recent data has 13% of the outstanding shares held short, and we think we would avoid the stock.
The Iridian investment team kept its position in Baxter International Inc. (NYSE:BAX) about constant at 3.7 million shares, allowing the $38 billion market cap medical supplies company to become one of the five largest holdings. Baxter is a bit more of a conventional value thesis with trailing and forward P/Es of 16 and 13, respectively, and modest growth rates of both revenue and earnings last quarter compared to Q4 2011. Billionaire Ken Griffin’s Citadel Investment Group was buying Baxter in the third quarter of 2012 (check out more stocks Griffin was buying).
The fund had initiated a position in Motorola Solutions Inc (NYSE:MSI) between July and September, and Iridian increased its stake further during the last three months of 2012 to enter January with 4.3 million shares in its portfolio. Analyst consensus for 2014 implies a forward price-to-earnings multiple of 14, and it may be worth looking into at that pricing. Billionaire George Soros also liked the stock last summer, adding to his holdings and closing the third quarter with a total of 2.9 million shares (research more stocks Soros owns).
Disclosure: I own no shares of any stocks mentioned in this article.
