The largest holding reported in the 13F was 6.5 million shares of Citigroup Inc. (NYSE:C). Citi has climbed 24% in the last year, beating the market, but the bank still trades at a sizable discount to book value with a P/B ratio of 0.7. Large banks have generally been doing well, and Citigroup is no exception with revenue and earnings rising in the fourth quarter of 2012 versus a year earlier. Analysts expect good times to continue, and as a result the stock’s forward earnings multiple is 8 and the five-year PEG ratio is 0.8. We think investors could consider Citigroup Inc. (NYSE:C) though other banks might be better buys. Citigroup was one of the five most popular stocks among hedge funds at the end of December (see more of the most popular stocks).
Investment bank Morgan Stanley (NYSE:MS) was another of Heebner’s favorite stocks. Morgan Stanley, like Citi, carries very optimistic expectations from the Street: consensus for 2014 implies a forward P/E of 8, and looking out further the PEG ratio is 0.6. While the bank did report revenue growth of more than 20% in its most recent quarter compared to the same period in the previous year, the bottom line has been more of a challenge. There could be a value case for Morgan Stanley (NYSE:MS) but we think there are sufficient opportunities elsewhere in financials where performance has been more dependable.
Capital Growth Management increased its stake in Lennar Corporation (NYSE:LEN) by 19% to a total of 4.9 million shares. The homebuilder has soared 63% in the last year as the housing market has turned up; sales have been up 42% contributing to a very high earnings growth rate. Consensus for the fiscal year ending in November 2014 currently implies a forward P/E of 17. Similarly to large banks, we think that investors should be watching housing related stocks but wouldn’t be sure that Lennar Corporation (NYSE:LEN) is the best way to play a housing thesis.
Whirlpool Corporation (NYSE:WHR) is up 46% in the last year- possibly on similar bullishness regarding housing- and Heebner and his team were buying the appliance manufacturer as well in the fourth quarter. However, results were actually poor in that quarter as revenue fell and margins contracted. Wall Street analysts believe that Whirlpool will recover, and its market capitalization of $8.7 billion places it at 10 times forward earnings estimates. Given the decline in business we think that we would avoid the stock for now.
The fund increased its holdings of PulteGroup, Inc. (NYSE:PHM), another homebuilder, by 24% to 8.9 million shares. The stock carries a beta of 2.2, demonstrating how sensitive it is to the broader economy. The forward earnings multiple here is 14, which would make PulteGroup a decent value if it was able to hit its earnings targets while maintaining its growth prospects. Of course we wouldn’t put too much faith in analyst projections and certainly we would want to examine PulteGroup’s peers- including Lennar- in more detail before recommending one or another.
Disclosure: I own no shares of any stocks mentioned in this article.
