JANA Partners, managed by Barry Rosenstein, is a value and activist hedge fund, and Aetna Inc (NYSE:AET) is one of its holdings. It is one of the hundreds of hedge funds which Insider Monkey tracks in our database of quarterly 13F filings, a database we use to develop investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year). While we don’t recommend blindly following hedge funds’ picks, we can screen them according to a number of criteria (including low earnings multiples) and take a quick look at these free investment ideas. Read on for our thoughts on JANA’s three largest holdings from its most recent 13F with both trailing and forward P/Es of 14 or lower (or see the full list of the fund’s stock picks).
Rosenstein and his team maintained a position worth more than $1 billion in Agrium Inc. (USA) (NYSE:AGU), a wholesaler and retailer of fertilizer and agricultural products, though the fund may have reduced its stake since the filing following its failed attempt to break up the company. Agrium dropped 5% on July 30th on news that another fertilizer company is going to increase its production, which should lead to a fall in market prices and therefore tougher conditions for Agrium’s business.
JANA disclosed ownership of 3.8 million shares of health insurer Aetna Inc (NYSE:AET) at the end of March. At a market capitalization of $21 billion, the stock trades at 13 times trailing earnings; health insurers are generally a bit cheap in the current market as investors worry about future regulation of the industry if health care costs continue to rise. In the first quarter of the year Aetna Inc (NYSE:AET)’s earnings fell slightly despite 7% revenue growth compared to a year ago. Greenlight Capital, managed by David Einhorn, reported a position of 6.5 million shares of Aetna Inc (NYSE:AET) in its own 13F (find Einhorn’s favorite stocks).
The fund moved heavily into Big Lots, Inc. (NYSE:BIG), increasing its holdings to a total of 3.8 million shares. With trailing and forward P/Es of 13 and 11, respectively, Big Lots is valued at a considerable discount relative to big-box discount stores such as Target and Wal-Mart; it’s also cheaper than dollar stores. In its most recent quarterly report (for the quarter ending in early May, the first of the company’s fiscal year), sales rose only slightly compared to the same period in the previous fiscal year. Big Lots attributed this to a decrease in same store sales in the U.S. market.
With sales growth driven by an increase in locations, then, Big Lots experienced a 21% decrease in earnings. It’s true that this particular fiscal quarter was a tough one for many retailers- a leaked Wal-Mart memo called it the worst start to a fiscal year ever, before the company only recovered enough to report 1% revenue growth- though clearly the retailer underperformed many of its peers. While one would think that closeout retail would benefit from a tough economic environment for many middle class and lower middle class Americans, the actual results have not been good and so even at its current earnings multiples Big Lots does not look too interesting.
As a result investors interested in discount retail might want to consider Wal-Mart or the dollar stores as higher-P/E alternatives which have delivered better financial performance recently. Agrium has also been struggling recently and this recent news is not good, but its earnings multiples are quite low as is and it might be worth waiting to see how the company actually handles developments in the fertilizer market. Health insurers generally seem interesting- although prospects for earnings growth seem slim- and so a review of industry players including Aetna Inc (NYSE:AET) may be appropriate.
Disclosure: I own no shares of any stocks mentioned in this article.
