The credit services industry has posted gains of more than 20% over the last 12 months, while year-to-date returns stand at nearly 4%. In order to uncover the best potential candidates in the industry for retail investors we decided to dig deep into the mounds of data gathered from the recent round of 13F filings and analyze which companies are getting the most attention from hedge funds.
Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 80 percentage points since the end of August 2012. These stocks returned a cumulative of 118% vs. 57.6% gain for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).
- Capital One Financial Corp. (NYSE:COF)
Investors with Long Positions (as of June 30): 41
Aggregate Value of Investors’ Holdings (as of June 30): $1.92 Billion
Capital One Financial Corp. (NYSE:COF) faced a loss of interest in the second quarter from the hedge funds we track, as the number of funds with investments in the company dropped from 51 firms holding $1.82 billion in shares at the end of March. So far this year, Capital One Financial Corp. (NYSE:COF)’s stock price has dropped by nearly 7%. Recently, the company announced that it was going to purchase GE Capital’s healthcare finance unit, which included $8.5 billion of U.S. healthcare-related loans. Ric Dillon’s Diamond Hill Capital is the largest stockholder of Capital One Financial Corp. (NYSE:COF) within our database, holding 3.59 million shares valued at $315.45 million.
- Discover Financial Services (NYSE:DFS)
Investors with Long Positions (as of June 30): 45
Aggregate Value of Investors’ Holdings (as of June 30): $1.58 Billion
Discover Financial Services (NYSE:DFS) also experienced greatly declining interest during the second quarter. At the end of the first quarter, 56 hedge funds had a total investment of $1.54 billion in Discover Financial Services (NYSE:DFS). The $22.37 billion direct banking and payment services company also made it to Goldman Sach’s recent list of the 25 most oversold stocks in the wake of the current correction. Currently, the stock is trading at a cheap forward earnings multiple of 9.21. Daniel S. Och‘s OZ Management decreased its stake in the company by 2% during the June trimester to 4.29 million shares.
- American Express Company (NYSE:AXP)
Investors with Long Positions (as of June 30): 57
Aggregate Value of Investors’ Holdings (as of June 30): $15.84 Billion
Although the number of investment firms with American Express Company (NYSE:AXP) in their equity portfolios decreased from 65 at the end of March, the total investment increased from $15.62 billion while the stock was trading nearly sideways during this period. Warren Buffet‘s Berkshire Hathaway owns about 151.61 million shares of American Express Company (NYSE:AXP) valued at $11.78 billion. Considering its cheap valuation with a forward earnings multiple of 13.30 and interest from other prominent funds like Jeffrey Ubben’s ValueAct Capital, which took a $1 billion stake in the company recently according to Bloomberg, American Express Company (NYSE:AXP) has strong future prospects as an investment.
- Mastercard Inc (NYSE:MA)
Investors with Long Positions (as of June 30): 75
Aggregate Value of Investors’ Holdings (as of June 30): $7.74 Billion
The number of hedge funds holding Mastercard Inc (NYSE:MA)’s stock dropped from 83 at the end of the first trimester, and while the total investment increased from $7.63 billion, if you factor in the 9% rise in the stock price during the second quarter, you see that hedge funds sold off some shares. One of the major growth areas for Mastercard Inc (NYSE:MA) going forward is the opening of the French domestic market to credit cards. The second-largest market in Europe will be ushering in new regulations in June of next year, allowing Mastercard Inc (NYSE:MA) to compete with the local rival Cartes Bancaires, which has a near monopoly. Tom Russo‘s Gardner Russo & Gardner is the largest stockholder of Mastercard Inc (NYSE:MA) within our database, holding 10.03 million shares valued at $937.81 million.
- Visa Inc (NYSE:V)
Investors with Long Positions (as of June 30): 98
Aggregate Value of Investors’ Holdings (as of June 30): $7.88 Billion
Visa Inc (NYSE:V) is the only company on our list that gained an increase in hedge fund interest, as 93 funds had investments in the company at the end of March. However, the total investment of these firms dropped from $7.99 billion even though the stock price appreciated by more than 15% during the second quarter, indicating a rather sizable collective sale of shares. Ken Fisher‘s Fisher Asset Management, the largest stockholder of Visa Inc (NYSE:V) in our database, was not one of them, having increased its holding by 2% during the June quarter to 14.55 million shares. According to Sky News, Visa has been trying to strike a deal to acquire Visa Europe for around $21 billion. The European division is currently owned by a number of European banks and other entities.
Disclosure: None
