We track quarterly 13F filings from hundreds of hedge funds, including billionaire Ken Griffin’s Citadel Investment Group, as part of our work developing investment strategies. Following our research showing that the most popular small cap stocks among hedge funds tended to outperform the market by an average of 18 percentage points per year (learn more about our small cap strategy), we created a portfolio based on this strategy which beat the S&P 500 by 33 percentage points in the last 11 months. We also like to use 13Fs to keep tabs on what individual hedge funds are doing- not to blindly follow them, necessarily, but to see if they have any interesting investment ideas which we would like to research further. We have gone through Citadel’s most recent 13F compared to the previous one (see a history of Citadel’s stock picks) and here are four trades we noticed the fund had made during the second quarter of 2013:
Apple. Citadel’s largest equity position, after increasing its holdings by about 50% during the quarter, is Apple Inc. (NASDAQ:AAPL) (we’d note that the fund also owns large numbers of call and put options on the stock). Apple Inc. (NASDAQ:AAPL) had been the most popular stock among hedge funds in the first quarter of the year (check out the full top ten list) and seems to have still been quite popular as of the beginning of July. Its earnings fell over 20% in its most recent quarter compared to the same period in the previous fiscal year, but the trailing P/E is only 13 and that is with cash accounting for a large portion of the market cap. We’d be interested in following Apple Inc. (NASDAQ:AAPL)’s plans to return more of this cash to shareholders.
Selling Citigroup. The fund sold about 90% of its holdings of Citigroup Inc (NYSE:C), which has been a hedge fund favorite among megabanks, between April and June. There is a value case for Citigroup Inc (NYSE:C): it is valued at a discount to the book value of its equity (the P/B ratio is 0.8), net income has been increasing at a rapid rate, and analyst expectations based on its recent performance are implying a forward earnings multiple of only 9. We’d note that similar theses hold for many other large banks. Griffin’s sales mean he is taking an opposite tack to fellow billionaire David Tepper of Appaloosa Management, whose 13F showed purchases of Citigroup Inc (NYSE:C) during Q2.
Selling Disney. According to the filing, Citadel also reduced its stake in The Walt Disney Company (NYSE:DIS), which had been the fund’s second largest single-stock equity position at the end of March, to 1.7 million shares. The trailing and forward P/Es of 19 and 16, respectively, are in line with what we see at many other media and entertainment companies. The Walt Disney Company (NYSE:DIS)’s fiscal Q3 (which ended in June) showed low growth versus a year earlier as weak results in the film business offset growth elsewhere in the company, notably in the parks business. For the first nine months of the fiscal year, however, earnings per share have increased a decent 7%.
We think that Discover makes sense as a value prospect, given its cheap multiples and good financial performance. We’d also recommend that value investors take a closer look at Citigroup Inc (NYSE:C), even with Citadel selling, though it’s possible that peer banks might be better deals. In the case of Apple Inc. (NASDAQ:AAPL) we would be a bit concerned about further decreases in earnings, but the current valuation seems to already account for at least some continued decline and so we’d be quite interested in learning how the company plans to use its cash.
Disclosure: I own no shares of any stocks mentioned in this article.
