Richard S. Pzena’s Pzena Investment Management has filed its 13F with the Securities and Exchange Commission for the reporting period of March 31. The fund, founded by Pzena in 1996, utilizes a traditional value approach to investing, seeking out under-valued companies with strong track records and solid earning potential. As such, the fund has a longer-term approach to its holdings, and that’s evident from the limited turnover within its equity portfolio during the first quarter.
We’ll take a look at the top four of the fund’s holdings, but first, let’s discuss why we track hedge fund activity in the first place. While we do track and report on the latest news, as short-term events can have a material impact on a company’s long-term outlook, we are in fact more interested in fund’s 13F filings, which we use to determine the top 15 small-cap stocks held by the funds in our database. We gather and share this information based on 16 years of research, with backtests for the period between 1999 and 2012 and forward testing for the last 2.5 years. The results of our analysis show that these 15 most popular small-cap picks have great potential to outperform the market, beating the S&P 500 Total Return Index by nearly one percentage point per month on average in backtests. Since our small-cap strategy was officially launched in August, 2012, it has been immensely successful, outperforming the market every year and returning 137.7% through April 14, which is more than 80 percentage points higher than the returns of the S&P 500 ETF (SPY) during that time (see more details).
Cigna Corporation (NYSE:CI) moves into the top spot in Pzena’s equity portfolio. Though the position was trimmed by 8% during the first quarter, it nonetheless moved past four other stocks to climb to the top, amid Pzena trimming many of its top holdings. And despite that trimming, the position increased in value to $610.73 million from its 4.72 million remaining shares, as Cigna Corporation (NYSE:CI) shares enjoyed a big quarter, gaining over 25%. Pzena opened the position during the second quarter of 2013 in the middle of the stock’s strong run from mid-2012 to present, during which shares have tripled in value. The health insurance company posted earnings per share of $1.96 for the first quarter of 2015, outpacing estimates by $0.12, while revenue was up by 11% from the same year-ago quarter at $9.47 billion. Pzena had by far the largest position in Cigna Corporation (NYSE:CI) of the funds we track, with billionaire Larry Robbins among the other investors with notable positions.
Hewlett-Packard Company (NYSE:HPQ) had been Pzena’s top equity holding for over two years running, but was finally dethroned this past quarter by Cigna’s strong performance. Pzena did also trim its HP holding slightly, by 2%, which left it with a value of $551.01 million from 17.68 million shares. Like Cigna, Hewlett-Packard Company (NYSE:HPQ) enjoyed a strong run through 2013 and 2014, but that run may have reached its end, with shares tumbling by 22% during the first quarter. It’s certainly a no-brainer among investors which stock is the more attractive one between it and Apple Inc. (NASDAQ:AAPL), despite HP’s currently reduced entry point. HP posted dismal first quarter results, with revenue falling by 4.7% from a year ago to $26.8 billion. Hewlett-Packard Company (NYSE:HPQ) will split into two later this year, a hardward business and an IT services enterprise. Current large shareholders like Cliff Asness and D E Shaw will have to decide at that time if they will contain to own shares of one or both of the new companies.
Oracle Corporation (NYSE:ORCL) is next in Pzena’s portfolio, the position ranking third with a value of $509.07 million and consisting of 11.80 million shares. Oracle, which is one of the biggest software companies in the World, is also a top tech pick of another value investor, Donald Yacktman, who owns a 35.07 million share position. Both investors trimmed their stakes in Oracle Corporation (NYSE:ORCL) during the first quarter, a period in which shares of the software provider slid by 4%. The reduced price may represent the perfect time to buy, as beyond the two value investors are several analysts who believe Oracle Corporation (NYSE:ORCL) is an undervalued stock at this point, with a growing cloud services business on top of its stable software and licensing business. Oracle is currently trading at a forward P/E of just 14.62, which is particularly low for a tech company, and why value investors like Pzena and Yacktman think highly of it.
Lastly we come to American International Group Inc (NYSE:AIG), the fourth-most valuable equity holding of Pzena. The position stands at 9.22 million shares with a value of $505.16 million as of March 31. The insurance company is another long term investment of Pzena’s, residing among the fund’s top holdings for more than three years. While it’s been a successful run for American International Group Inc (NYSE:AIG) throughout that time, with shares gaining 88% over the past three years, its shares struggled in the first quarter, dipping by 2%. Those returns contributed to mutual fund Fairholme’s poor performance during the first quarter, as AIG was the fund’s top pick. Shares have appreciated by more than 5% in May however following first quarter earnings that beat estimates, though they were still down by 3% year-over-year at $1.22 per share. AIG announced a decrease in its dividend to $0.12 during its first quarter earnings report, down from $0.13 during the past five quarters.
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