Managed by Eric Edidin and Josh Lobel, Archer Capital currently has at least $625 million in its equity portfolio, according to its most recent 13F filing with the SEC. This marked an increase from $339 million the prior quarter. Furthermore, the top five stocks in Archer’s equity portfolio currently make up 25% of total holdings, and it’s worth noting that generally speaking, the fund has a penchant for services and consumer goods stocks. See Edidin and Lobel’s profile here, but the point is this: it can pay off big to piggyback the smart money.
At Insider Monkey, we track 450 of the world’s most elite hedge fund managers and our research has shown that over time, their picks routinely outperform. For more than a decade in our back tests, hedge funds’ consensus small cap picks beat the market by 18 percentage points a year; learn more about this research here.
Furthermore, it’s also crucial to look at each of the funds we track individually, and by using the latest round of fourth quarter 13F data from the SEC, we can determine how these funds were preparing for 2013. Let’s take a look at Archer Capital.
Coming in at number one is Macquarie Infrastructure Company LLC (NYSE:MIC). Currently near $54 per share, the stock is trading at its high for the year, but could come under profit-taking pressure at this level. Fundamentally, there are additional reasons why this stock is faltering. Macquarie Infrastructure Company LLC (NYSE:MIC)’s latest earnings report indicated a rather dramatic drop in net income (52%) from 2011, with a corresponding decline in EPS to $0.29. The stock is currently trading at 185 times trailing earnings versus a sector average of 30.0x, so it’s easy to see that this hedgie is focused on momentum—at least with Macquarie Infrastructure Company LLC (NYSE:MIC).
Moving on, at number two is Lear Corporation (NYSE:LEA), which supplies automotive seat systems as well as electrical distribution systems. The company, with a market cap of $5.3 billion, recently posted better-than-expected earnings, and has avoided a proxy fight with “activist investors” by agreeing to increase its share buyback program. Unfortunately, Lear Corporation (NYSE:LEA)’s stock price has been stuck in a sideways trend since early February at the $54 to $56 level. Once the stock can sustain a challenge to $55.80, a move to $62 should be unobstructed. Compared to its closest competitors, Johnson Controls, Inc. (NYSE:JCI) and Delphi Automotive PLC (NYSE:DLPH), Lear trades at 1.5 times book value, an average discount of over 60% to these peers.
The third member of this top five is Dana Holding Corporation (NYSE:DAN), which is also a supplier to the automotive industry. Compared to Lear, Dana Holding Corporation (NYSE:DAN) trades at 12.6 times trailing earnings, while Lear is at 4.3x. Although both companies have had relatively flat revenue growth year-over-year, sales devoted to COGS fell 2% to 86% for Dana, but remained unchanged for Lear, near the 90% threshold. Dana continues to come under technical pressure at the $18 to $18.20 level, and appears to be retreating off of this range for more profit taking. Still, the stock retains its “buy” rating from analysts—on average—with an upside target of $19.50 per share moving forward.
Number four in Archer’s top five is Lumos Networks Corp (NASDAQ:LMOS). Since adding the stock to Archer’s equity portfolio in the second quarter of 2012, the fund’s managers have doubled their position in the fiber-based service provider, making Archer the largest holder of Lumos Networks Corp (NASDAQ:LMOS) among the hedge funds we track. Despite flat revenue from last year, net income improved from -$43.9 million to $16.3 million, and Lumos’s stock price has steadily moved higher, now resting at a 13-month high of $13.49 per share. It’s easy to see why this hedgie is bullish.
Lastly, we have W.P. Carey Inc. REIT (NYSE:WPC). Taking the fifth spot in Archer’s equity portfolio, the stock started the year by racing to a high of $68.45, subsequently rallying 7% on March 15th after announcing a first quarter dividend increase of 24%. Since then, though, shares have been moving sideways, and seem to be coming under pressure, as investors digest very lackluster earnings. Revenue rose 27% for 2012, but net income fell by 57% as operating expenses increased 28% from 2011. Right now, the stock is in a downtrend with the next support level at $65. But for the longer-term, W.P. Carey Inc. REIT (NYSE:WPC) converted to a REIT last year and, like most REITs, the stock could benefit from the overall bullish trend in real-estate stocks.
As you look at the remaining holdings in Archer’s portfolio, what is most striking is that the fund has none of the high-profile stocks you often see among most hedge funds, such as Apple, Google, AIG and Sprint. With little name recognition, it’s clear that these five picks were chosen for their bullish fundamentals as well as long-term growth prospects in the automotive, technology and real-estate sectors. Going forward, it’s definitely important to pay attention to W.P Carey, Lumos, the auto suppliers Lear and Dana, and Macquarie Infrastructure Company LLC (NYSE:MIC). We’ll be watching this group here.
Disclosure: None
