Five Ideas From One of the Big Guns

 | Feb 24, 2013 | 5:00 PM EST
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Hedge funds' 13F filings are filed within 45 days of the end of each quarter, but we have found it possible to build profitable trading strategies around these quarterly disclosures. Stocks named in these filings, after all, can be used as free recommendations. The most popular small-cap stocks among hedge funds, for instance, earn an average excess return of 18% per year. So even if most of the reported holdings aren't attractive, there are still good finds among them -- or, at least research ideas.

With that in mind, let's take a look at the five largest positions reported by Kerr Neilson's Platinum Asset Management (which you can compare with those in previous filings). At the end of 2012, Platinum owned more than 37 million shares of Bank of America (BAC), making the megabank its largest holding by market value. BofA is arguably a very cheap stock in terms of market capitalization vs. equity book value, as the price-to-book ratio is 0.6. Still, revenue and earnings were both down sharply in the fourth quarter from a year earlier, and when we focus on the bottom line instead, the bank does not look cheap. Even if it recovers in line with sell-side estimates, it will remain at least as pricy as other large banks in terms of the forward price-to-earnings ratio.

Meanwhile, Microsoft (MSFT) dropped out of our list of the five most popular stocks among hedge funds last quarter -- but Platinum increased its stake by 22%, to a total of 13 million shares. News has been mixed regarding the Windows 8 operating system and the Surface tablet releases, and we would generally be hesitant to make any investment decisions without harder numbers. That said, profit is expected to climb temporarily amid the new versions of Windows and Office -- it's a given that many customers will be buying the products regardless. As a result, the forward-earnings multiple is currently abnormally low at 9x.

Platinum was also recently buying Google (GOOG), whose fourth-quarter earnings rose year over year despite the addition of Motorola Mobility Holdings -- a business that's been a challenge for the company's bottom line. The stock is trading at only 15x forward-earnings estimates, and if earnings continue to grow at high rates, Google will actually prove undervalued at its current price. We think it might be worth trying to game out the company's financials for the next couple of years to see how achievable this might be.

Neilson and his team also reported a position of almost 13 million shares in Cisco Systems (CSCO). Cisco's trailing P/E is only 12x; the market expects very little growth from the company despite its very high earnings-growth rate in the most recent fiscal quarter (ended January) vs. the year-earlier period. Revenue growth was down, but still high enough that we would be interested in considering Cisco as a value play.

Finally, the fund upped its holdings of Sina (SINA) by 18% last quarter, and the stock was its fifth-largest position at the end of 2012. In the past year, shares of this China-based Web portal have fallen 10% amid growing investor skepticism regarding China's growth and its companies' financial statements. Even if an investor is not worried about those factors with respect to Sina, the company's valuation is challenging at a current-year P/E of 34x. We do not think this pricing is justified: Most recently, revenue rose a comparative low 17% from the prior year.

-- Written by Matt Doiron

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