Here Are This Elite Fund’s Top Five Stock Picks

Francis Chou, a well-known value investor, who was named Morningstar Fund Manager of the Decade in 2004, founded Chou Associates Management in 1986. Because of perceptive stock picking, the fund has since grown to have an equity portfolio of $291.2 million, as of September 30. Performance has been solid, with Chou Associates Fund Series A units sporting an average annualized compound return of 11.2% since inception. Without further ado, let’s take a closer look at Chou’s top picks, which include Citigroup Inc (NYSE:C), Resolute Forest Products Inc (NYSE:RFP), Nokia Corporation (ADR) (NYSE:NOK), Sears Holdings Corp (NASDAQ:SHLD) , and Berkshire Hathaway Inc. (NYSE:BRK.A).

But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 36 month period beginning from September 2012 (see more details here).

#5 Sears Holdings Corp (NASDAQ:SHLD)

Shares held (as of September 30): 896,088
Total Value (as of September 30): $20.26 million
Percent of Portfolio (as of September 30): 6.96%

With the unemployment rate dropping to 5% and wage growth beginning to perk up, the U.S. economy is red hot right now. Given the better economy, department store chain Sears Holdings Corp (NASDAQ:SHLD) should benefit, but shares haven’t done very well year-to-date, losing 28.65%. Because of competition, Sears and Kmart comparable-store sales continue to decline and the company continues to burn through cash. The bulls hope Eddie Lampert can turn the company around. Bruce Berkowitz’s Fairholme (Fairx) was long 6.42 million shares at the end of June.

#4 Citigroup Inc (NYSE:C)

Shares held (as of September 30): 410,000
Total Value (as of September 30): $20.35 million
Percent of Portfolio (as of September 30): 6.99%

After falling to $48 per share in late-September from $60 in mid-July, shares of Citigroup Inc (NYSE:C) have rallied to around $56 on the back of a great unemployment report and optimism that the Federal Reserve will raise interest rates by the end of the year. If the Federal Reserve raises the rates, Citigroup will realize a wider net interest margin and earn more profits, which it can use to buy back stock and pay a higher dividend. Lower unemployment will also increase more lending and reduce Citigroup’s write-offs. Seth Klarman’s Baupost Group and Dan Loeb’s Third Point were among the 126 hedge funds long the stock at the end of June.

#3 Nokia Corporation (ADR) (NYSE:NOK)

Shares held (as of September 30): 3.75 million
Total Value (as of September 30): $25.43 million
Percent of Portfolio (as of September 30): 8.73%

For its third quarter, Nokia Corporation (ADR) (NYSE:NOK) earned 0.08 euros ($0.09) per share, beating estimates by 0.01 euros per share while revenues came in a little bit under expectations at 3.04 billion euros, missing by 620 million euros. Because the company has excess capital, management plans to buy as much as 1.5 billion euros in shares back within the next two years. The buybacks should increase EPS and help Nokia’s stock, which is down 2% year-to-date.  Dan Loeb’s Third Point owned 3 million shares at the end of June.

#2 Resolute Forest Products Inc (NYSE:RFP)

Shares held (as of September 30): 4.28 million
Total Value (as of September 30): $35.59 million
Percent of Portfolio (as of September 30): 12.22%

Although shares are down 56% year-to-date and all five analysts covering Resolute Forest Products Inc (NYSE:RFP) have ‘Hold’ ratings, hedge funds are bullish. According to our data of around 730 elite funds, 22 funds reported stakes worth $523.31 million (representing 48.90% of the float) at the end of June, versus 18 funds and $848.43 million at the end of March. Prem Watsa‘s Fairfax Financial Holdings was among the long holders at the end of the second quarter, with a stake of 29.05 million shares. Resolute Forest Products reported a mixed third quarter, with EPS beating estimates by $0.08 per share and revenue missing by $24 million as the specialty paper market has been challenging.

#1 Berkshire Hathaway Inc. (NYSE:BRK.A)

Shares held (as of September 30): 300
Total Value (as of September 30): $58.59 million
Percent of Portfolio (as of September 30): 20.12%

Although autonomous cars software and increased vehicle utilization rates will likely lower auto insurance premiums over the next decade, Berkshire Hathaway Inc. (NYSE:BRK.A) is still a great long term holding, as it is well diversified and has adjusted to secular changes before. Each of Warren Buffett’s divisions has a wide moat and earns a solid return on capital. Given the rising rates in the coming quarters, look for financials-heavy Berkshire Hathaway to benefit substantially. Although shares are down by 9.4% year-to-date, the negative performance will not last for long given Buffett’s great long term track record.

Disclosure:None