At Insider Monkey, we track hedge fund and insider buying activity because these indicators are two of the best ways to accurately gauge the “smart sentiment” surrounding a stock. Generally speaking, corporate executives of mid to smaller-cap companies have a better understanding of their businesses, and our studies prove this. We’ve shown that retail investors can beat the market by 7 percentage points a year by simply following bullish insider trading, and this outperformance stretches to the hedge fund industry as well.
Our Billionaire Hedge Fund Index—created in collaboration with MarketWatch—returned 24.3% last year, beating the S&P 500 ETF (NYSEARCA:SPY) by a handy 8.3 percentage points. In layman’s terms, this indicates that the cream of the crop’s consensus picks can outpace the market, but it’s worth noting that longer-range studies show that the most alpha can be generated from the small-cap space (learn how to use this market-beating strategy yourself).
With this in mind, ardent investors would be best served by determining hedgies’ favorite stock picks that have also been supported by insiders in the last 90 days. One of the most prominent hedge fund managers today is David Einhorn, so it’s worth taking a look. Einhorn’s fund, Greenlight Capital, has returned near 20% annually since its inception in 1996.
According to his latest 13F filing with the SEC, Apple Inc. (NASDAQ:AAPL) has been Einhorn’s No. 1 holding since the third quarter of 2011. Greenlight recently issued a press release showing its displeasure with Cupertino’s capital allocation plans, and it’s likely that many investors agree with Einhorn when he says “Apple Inc. (NADSAQ:AAPL) must examine all of its options to unlock the growing value of its balance sheet for all shareholders.”
Director Robert Iger’s decently sized round of purchasing activity last November has been in vain thus far, but a PEG of 0.75 and a forward earnings multiple below 9.0x indicates that there’s an obvious value play here. A dividend boost or a strengthened share buyback would likely draw more investors into Apple Inc. (NASDAQ:AAPL), and the company’s “secret” hedge fund may be preparing for just such an event.
General Motors Company (NYSE:GM), meanwhile, is a favorite pick of both Einhorn and Warren Buffett (see Buffett’s top stock picks here), and has seen two insiders buying in the past six months. GM has risen more than 11% since the latest exec—Thomas Schoewe—bought shares in November of last year. At 1.07 times its book value, there’s no denying this automaker’s stock is cheap at the moment, and beats in four of its last five earnings reports have investors optimistic on the toes of next week’s Q4 earnings report.
Who’s the best of the rest aside from GM and Apple Inc. (NASDAQ:AAPL)?
DST Systems, Inc. (NYSE:DST), Liberty Media Corp (NASDAQ:LMCA), State Bank Financial Corp (NASDAQ:STBZ) and Babcock & Wilcox Co (NYSE:BWC) are the next four largest holdings in Einhorn’s portfolio with bullish insider sentiment of late. Excluding Liberty, which spun off Starz (NASDAQ:STRZA) in January, this group has returned an average of 4.2% since the start of the New Year. Babcock and DST trade at sizable discounts to their industry averages, and State Bank’s earnings are particularly undervalued on a forward-looking basis.
Out of the 37 equity holdings in David Einhorn’s latest 13F portfolio, just one has experienced purchases by multiple insiders over the past three months: Fifth Street Finance Corp. (NASDAQ:FSC). Interestingly, Fifth Street is the smallest position in Greenlight Capital of the stocks mentioned here, but shares are up more than 5% since three executives’ latest round of buying ended in late December. A dividend yield in excess of 10% is an obvious point of attraction for investors of all philosophies, and a monthly payout schedule gives Fifth Street an extra bit of pizazz.
Disclosure: I hold no positions in any of the stocks mentioned above
