Merchants’ Gate Capital, a hedge fund managed by Jason Capello, recently filed its 13F for the fourth quarter of 2012. This wave of 13f filings from hedge funds and other major investors discloses many of the long equity positions that each owned at the end of December- in other words, what they liked going into 2013. We use 13F filings in a number of ways. One way is to collect them in a database and attempt to develop investment strategies; the most popular small cap stocks among hedge funds, as listed in our August 2012 newsletter, outperformed the S&P 500 by 18 percentage points between September and January (read more about our hedge fund strategies). A more conventional use would be to treat the largest positions on a 13F such as Merchants’ Gate’s as free recommendations that might otherwise come from an interview or a dinner conversation; investors can study these stocks in more detail if they seem appealing. Read on for five of the fund’s top stock picks and compare them to previous filings.
Merchants’ Gate’s largest holding by market value was Schlumberger Limited. (NYSE:SLB) with the fund reporting a position of 3.7 million shares. Schlumberger made our list of the most popular energy stocks among hedge funds in the third quarter of 2012 (find more energy stocks hedge funds loved). The company’s earnings were down slightly last quarter compared to the same period in 2011, though revenue was up. Schlumberger trades at 19 times trailing earnings as the market expects considerable growth growing forward; we might compare it to peers such as Halliburton Company (NYSE:HAL).
The fund slightly cut its stake in Expeditors International of Washington (NASDAQ:EXPD), but at 5.9 million shares the $8.9 billion market cap logistics and freight forwarding company was still the second largest position in the 13F portfolio. Expeditors has been struggling recently, with declines on both top and bottom lines, and the valuation seems pricy with both trailing and current-year P/E multiples above 20. The Bill and Melinda Gates Foundation trust is another major shareholder in Expeditors (check out more stocks that Bill Gates’ trust owns).
Airgas, Inc. (NYSE:ARG), a distributor of gases for industrial, medical, and other functions, was another of Merchants’ Gate’s top picks. The fund added a small number of shares after a third quarter in which they had moved heavily into the stock. Billionaire Richard Chilton’s Chilton Investment Company owned almost 1 million shares of Airgas at the end of September (see Chilton’s stock picks). Airgas trades at 22 times trailing earnings, and even though the company experienced 14% earnings growth in the fourth quarter of 2012 versus a year earlier that might be a bit high for a potential value investment.
Capello and his team reported a position of 2.8 million shares in C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW), which is a freight transportation and logistics company and therefore one of Expeditors’ peers. Its revenue has been up considerably, resulting in at least temporary high growth rates of net income. It might be well worth investigating how sustainable those growth rates are with the trailing earnings multiple being only 16. Citadel Investment Group, managed by billionaire Ken Griffin, was buying the stock in the third quarter and closed September with 1.8 million shares in its portfolio (find Griffin’s favorite stocks).
Merchants’ Gate sold shares of Ecolab Inc. (NYSE:ECL) but still owned 2.2 million shares of the $22 billion market cap cleaning products and consumer goods company at the beginning of the year. Boykin Curry’s Eagle Capital Management had owned a little under 9 million shares in its most recent 13F filing (research more stocks Eagle owned). Ecolab is another company that is expected to see strong growth: it carries trailing and 2013 P/Es of 38 and 21 respectively. Earnings were up 54% in Q3 2012 compared to the same period in the previous year.
Disclosure: I own no shares of any stocks mentioned in this article.
