I think this weakness could continue over the interim and so do analysts. Consensus estimates show that Seagate is expected to see EPS fall at an annualized 4% over the next five years versus the 38% annualized growth over the last five years.
What’s more is that famed short seller Jim Chanos touted Seagate as a prime short idea at this year’s Ira Sohn conference. Yet, Seagate has been one of billionaire David Einhorn’s top picks for a number of quarters (check out EInhorn’s small cap picks).
Defense & tobacco
Some of Greenblatt’s notable increases in shares owned during the first quarter include Northrop Grumman Corporation (NYSE:NOC) and Lorillard Inc. (NYSE:LO). Greenblatt increased his shares owned by 82% in Northrop and 42% in Lorillard.
Northrop is the world’s third-largest producer of military arms and equipment, with about 90% of its revenue from defense. Revenue is expected to decline by 5% in 2013 due to the the U.S. defense budget difficulties. The company does pay investors a 3% dividend yield, which helps with downside protection. Aerospace systems is its biggest segment (37% of revenue), which includes one of the most popular pieces of defense equipment, the F-35.
For fiscal 2014, funding for the F-35 was reaffirmed in the government’s budget, and funding for Northrop’s E-2D Advanced Hawkeye by 25%, while 21 EA-18G Growlers funding got a proposal for double the financing from 2013.
Northrop is also traded the cheapest of the major defense contractors at only 10.3 times earnings compare this to Lockheed Martin Corporation (NYSE:LMT)‘s 11.9 times and Raytheon Company (NYSE:RTN)‘s 11.2 times. The company also has approximately $3.2 billion in cash versus $3.9 billion in debt.
Going into the second quarter, there were a total of 28 hedge funds long the stock, a 22% increase from the first quarter. First Eagle Investment Management, managed by Jean-Marie Eveillard, has the largest position, worth $425 million (check out First Eagle’s portfolio).
Smoking
The other new addition to Gotham’s portfolio was Lorillard, the U.S.’ third-largest tobacco company. First-quarter EPS came in at $0.66, compared to the prior-year quarter’s $0.58 as Lorillard continues to snatch up market share thanks to its leading brand, Newport. Sales growth has also been solid, and is expected to be up another 4% in 2013 after a 4% rise in 2012.
Lorillard pays an impressive 5.2% dividend yield. The big driver for the company over the interim should be discount brand volume growth. Lorillard also appears to be one of the cheapest tobacco companies around. Lorillard trades at 13.5 times earnings, with other major tobacco companies stacking up as follows: Reynolds American, Inc. (NYSE:RAI) 17.8 times, Altria Group Inc (NYSE:MO) 16.5 times and Philip Morris International Inc. (NYSE:PM) at 18.7 times.
Bottom line
The value investor Joel Greenblatt loves defense and cigarettes, and I tend to agree. The dividend yields for both Northrop and Lorillard are a big positive and the worry from defense budget cuts seem to be overblown. Meanwhile, I would hold off on investing in Seagate given the decline in hard disk drives and rise of tablets. Also, the M&A play in Warner Chilcott Plc (NASDAQ:WCRX) is likely not for every investor, but GameStop Corp. (NYSE:GME)’s recent big sell-off could be a buying opportunity.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool owns shares of Northrop Grumman.
The article Gotham Asset’s Interesting Moves originally appeared on Fool.com.
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