Pzena Investment Management Is Betting Big on These Five Stocks

Pzena Investment Management is a New York-based deep value investment firm founded by Richard S. Pzena in 1996. Apart from its headquarter in New York, the firm also has an office in Melbourne, Australia. As of August 2014, the fund boasts of $26.4 billion in assets under management. Pzena Investment Management recently submitted its 13F filing with the SEC for the reporting quarter ending September 30. The filing revealed that at the end of September Pzena Investment Management’s US  equity portfolio was worth over $15.70 billion and 39% of it consisted of stocks from the financial sector. In a previous post we have analyzed Pzena Investment Management’s top dividend stocks at the end of the third quarter and in this article we are going to take a closer look at the fund’s top five stock picks overall at the end of September.

But before proceeding to that let’s first understand why we at Insider Monkey track hedge fund activity. From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 37 month period beginning from September 2012 (read more details here).

#5 Exxon Mobil Corporation (NYSE:XOM)

Shares Owned by Pzena Investment Management (as of September 30): 6.10 million shares

Value of Holding (as of September 30): $454.26 Million

Owing to Pzena Investment Management increasing its stake by 45% or over 1.91 million shares during the third quarter, Exxon Mobil Corporation (NYSE:XOM) jumped to become the fund’s fifth largest holding at the end of that period even though the stock of the company declined by almost 10% during the July-September period. After declining gradually throughout the first three quarters of the year, shares of Exxon Mobil Corporation (NYSE:XOM) started rallying from the beginning of October and have now narrowed their year-to-date loss to only 8.64%. On November 6, it was reported that regulators in New York are investigating allegations against the company that for decades it hid the facts that its fossil fuel business causes damage to the environment and climate. For the third quarter of fiscal 2015, the company reported EPS of $1.01 on revenue of $67.34 billion, which was better than analysts’ expectation of EPS of $0.89 on revenue of $63.75 billion. Billionaire David E. Shaw‘s firm D.E. Shaw nearly tripled its investment in the company during the second quarter to over 3.85 million shares.

#4 Citigroup Inc (NYSE:C)

Shares Owned by Pzena Investment Management (as of September 30): 9.31 million shares

Value of Holding (as of September 30): $461.92 Million

The over 10% decline in Citigroup Inc (NYSE:C)’s shares during the third quarter coupled with Pzena Investment Management selling 2% or 251,234 shares during the same period relegated the company to being the fourth largest holding of Pzena Investment Management at the end of September from being the second largest at the end of June. On November 6, shares of the company spiked up more than 3% after the Bureau of Labor statistics released dismal non-farm payroll data for October. On October 15, Citigroup Inc (NYSE:C) came out with its fiscal 2015 third quarter results, reporting EPS of $1.31 on revenue of $18.50 billion, compared to EPS of $1.15 on revenue of $19.98 billion that it had reported for the same quarter last year. With an ownership of over 102.5 million shares of Citigroup, Seth Klarman‘s Baupost Group was the largest shareholder of the company at the end of June among the hedge funds tracked by us.

#3 American International Group Inc (NYSE:AIG)

Shares Owned by Pzena Investment Management (as of September 30): 8.19 million shares

Value of Holding (as of September 30): $465.23 Million

Insurance giant American International Group Inc (NYSE:AIG) retained its position as Pzena Investment Management’s third-largest holding at the end of third quarter even though the fund sold 3% or 322,130 shares of the company during the July-September period. After rising more than 30% between February and July, shares of American International Group Inc (NYSE:AIG) witnessed a U-shaped correction period in the next 3 months and currently trade with year-to-date gains of 9.46%. Recently the stock of the company slid by more than 4% in a day after it released its fiscal 2015 third quarter earnings. While the Street was expecting the company to report EPS of $1.03 on revenue of $14.22 billion, it reported EPS of $0.52 on revenue of $12.82 billion. On November 3, analysts at Barclays reiterated their ‘Overweight’ rating on the stock, but lowered their price target on it to $71 from $73. John Armitage‘s Egerton Capital Limited initiated a stake in the company during the second quarter by purchasing almost 6 million shares.

#2 Bank of America Corp (NYSE:BAC)

Shares Owned by Pzena Investment Management (as of September 30): 29.87 million shares

Value of Holding (as of September 30): $465.40 Million

Notwithstanding the over 8% decline its stock had during the third quarter and Pzena Investment Management reducing its stake in it by 1% or 547,306 shares, Bank of America Corp (NYSE:BAC) still climbed up two places quarter-over-quarter to become Pzena Investment Management’s second largest holding at the end of September. The over 15% rally that shares of Bank of America Corp (NYSE:BAC) have experienced after it reported its third quarter results on October 14 has helped it in now trading flat for the year. The company declared EPS of $0.37 on revenue of $20.91 billion for the third quarter, versus analysts’ expectation of EPS of $0.33 20.77 billion. On November 2, analysts at BMO Capital Markets initiated coverage on the stock with an ‘Outperform’ rating. John Paulson‘s Paulson & Co reduced its stake in Bank of America by 15% to 18.66 million shares during the April-June period.

#1 HP Inc (NYSE:HPQ)

Shares Owned by Pzena Investment Management (as of September 30): 19.14 million shares

Value of Holding (as of September 30): $490.27 Million

Finally, Pzena Investment Management had added an additional 6% or over 1.15 million shares of HP Inc (NYSE:HPQ) [before the spin-off] during the third quarter and the combined entity remained its largest equity holding at the end of that period. On October 16, Hewlett Packard completed the split of  businesses into two separate trading entities, namely  HP Inc (NYSE:HPQ) and Hewlett Packard Enterprise Company (HPE). Shares of the combined entity experienced a gradual decline throughout 2015 going into the spin-off and as of October 15 were trading down more than 27% year-to-date. On November 9, analysts at BMO Capital Markets reiterated their ‘Market Perform’ rating on the stock of HP Inc (NYSE:HPQ). Moreover, on the same day they also initiated coverage on the stock of Hewlett Packard Enterprise Company (NYSE:HPE) with a ‘Market Perform’ rating and $16 price target. After Pzena Investment Management, Cliff Asness‘ AQR Capital Management was the largest shareholder of HP Inc at the end of the second quarter among the hedge funds tracked by us; it owned over 12.77 million shares of the company, as of June 30.

Disclosure: None