In August, hundreds of hedge funds and other major investors filed their 13Fs for the second quarter of 2013 (disclosing many of their long equity positions as of the end of June) if they had not already done so. Conventional wisdom is that the information in these filings is too out of date to be of any use, but we think that there are in fact a number of ways for mom-and-pop investors to improve their investing by studying 13Fs. First, we’ve actually shown that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy) and implemented this in a portfolio which has beaten the market by 33 percentage points in the last 11 months; we think that more strategies are possible as well.
Another potential use is to see overall which stocks hedge funds tend to like in different areas- not necessarily to blindly follow these picks, but to get an idea of broad trends in how they are approaching different industries and sectors. We have gone through our database and here are the ten retailers which the largest number of hedge funds and the other notable investors we track reported owning in their most recent filings:
Wal-Mart Stores, Inc. (NYSE:WMT) edged Dollar General (NYSE:DG) for the #1 spot in our list. At 14 times trailing earnings, Wal-Mart Stores, Inc. (NYSE:WMT) is close to being a value stock though the discount retailer did have a rough start to the current fiscal year with sales and net income up only slightly. Warren Buffett’s Berkshire Hathaway owned $3.7 billion worth of Wal-Mart Stores, Inc. (NYSE:WMT) at the end of June (see Buffett’s stock picks).
54 filers in our database reported a position in Dollar General, though this figure was down from 61 three months earlier. Earnings growth notably slowed for the company in its fiscal Q1 versus a year ago. Dollar stores are popular picks among “Tiger Cub” funds, including billionaire Stephen Mandel’s Lone Pine Capital which owned about 14 million shares of Dollar General (find Mandel’s favorite stocks).
Home improvement stores have been a fairly common way to play a strengthening housing market, helping make The Home Depot, Inc. (NYSE:HD) these filers’ third favorite retailer. Due to this optimism Home Depot’s trailing P/E has climbed to 22. Fisher Asset Management, an asset management firm managed by billionaire Ken Fisher, was one major shareholder in Home Depot (research more stocks Fisher owns).
Right behind Home Depot is peer Lowe’s Companies, Inc. (NYSE:LOW). While Lowe’s is valued at a small premium to its peer, it experienced double-digit gains on both top and bottom lines in its most recent quarter compared to the same period in the previous year. Billionaire Ken Griffin’s Citadel Investment Group moved heavily into the stock during Q1 and closed June with 5.5 million shares (check out more stocks Griffin likes).
On net, ten funds bought into troubled department store J.C. Penney Company, Inc. (NYSE:JCP) last quarter, joining billionaire Bill Ackman’s Pershing Square in that fund’s quest to turn the company around. See more stocks in Ackman’s portfolio. J.C. Penney’s revenue has continued to fall, and Wall Street analysts believe it will still be unprofitable next year. 29% of the float is held short.
Grabbing the sixth spot on our list is Dollar Tree, Inc. (NASDAQ:DLTR). As with Dollar General, this retailer is growing slowly, has little market exposure, and features earnings multiples in the high teens. Tiger Cub John Griffin’s Blue Ridge Capital disclosed ownership of 4.2 million shares as of the beginning of July.
43 hedge funds and other investors were long CVS Caremark Corporation (NYSE:CVS) per our database of filings. The stock carries trailing and forward P/Es of 17 and 13 respectively. AQR Capital Management closed Q2 with 3.1 million shares in its portfolio; that fund is managed by Cliff Asness (see Asness’s favorite stocks).
With a number of funds selling out of Walgreen Company (NYSE:WAG) between April and June, that pharmacy and convenience store fell to eighth place behind its rival CVS. Insurance company Markel’s investment unit, managed by Tom Gayner, kept its holdings about constant (here are more stocks from Markel’s portfolio).
J.C. Penney wasn’t the only turnaround prospect to make the list, as we recorded 39 filers with positions in Best Buy Co., Inc. (NYSE:BBY),which beat analyst expectations last quarter though it still has a ways to go. Billionaire Steve Cohen’s SAC Capital Advisors slightly increased its holdings (find more of Cohen’s picks).
Auto parts retailer AutoZone, Inc. (NYSE:AZO) rounds out our list of hedge funds’ favorite retail stocks. It is a low beta stock (beta of 0.2) and has been generating small increases in both revenue and profits. At 16 times trailing earnings, the company does not need to grow by much in order to justify its current valuation.
Disclosure: I own no shares of any stocks mentioned in this article.
