For Your Consideration

 | May 16, 2012 | 12:30 PM EDT  | Comments
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Stock quotes in this article:

rndy

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cjes

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spn

While watching an enjoyable Orioles victory over the New York Yankees last night, I sifted through the latest 13H filings. When I started writing in addition to managing investments, only a handful of folks tracked these filings with the Securities and Exchange Commission. Today, they are micro-analyzed all over the Internet. I have even heard discussion of an exchange-traded fund based on the combined buying and selling of the largest and most prominent investors and hedge fund managers who file these forms. Millions of investors hope to use these filings to emulate the strategies of Warren Buffet, David Tepper, Bill Ackman and David Einhorn, to name a few.

But I will let you in on a little secret: You really cannot replicate their strategies. You have no idea when during the quarter they bought the stocks. If they are executing an arbitrage strategy using the debt or derivatives of the stocks, there is no way for you to know this. Did they buy on a breakout or a breakdown? Was the market up or down that day? Unless you live next door and can get them to talk over a few glasses of wine, you will never know.

Blindly following anybody is a recipe for disaster, no matter how wonderful their record. The investor probably has different objectives and time frames than you do and is not going to share them with you. They do not disclose these positions as an act of philanthropy. They have to by law.

The 13H filings are useful for finding ideas for further research. I admire David Einhorn, but I would not follow him blindly. However, when I look at his filings and see that he is buying a small Wisconsin grocery chain, I am intrigued enough to wonder why. I will take a deeper look at Roundy's (RNDY) as the grocery industry is one that should continue to see substantial consolidation. It is the only way to grow and protect margins in that highly competitive industry. The company just came public this year and after a horrific quarter has fallen back towards its IPO price. Although it used IPO proceeds to pay down debt, the company is still heavily levered with more than $700 million of debt. I had no idea this company even existed, and it is not cheap enough to buy at this time, but thanks to Einhorn's filing it is going on my watch list.

I also admire David Nierenberg of D3 Partners. I have stolen several successful ideas from him over the years, as we seem to approach stocks in a similar fashion. We both favor long holding periods and look for very cheap stocks. I do not have the firepower to act as an activist as Nierenberg does, but I am always happy to let him act on my behalf. I am intrigued by his recent purchases in oil services. Both C&J Energy Services (CJES) and Superior Energy (SPN) are involved in fracking, though C&J Services is more a pure play. Superior has operation in offshore operations, primarily in the Gulf of Mexico. I am familiar with CJES and like the stock, but I have not done the work on Superior yet. Both appear very cheap and could soar when drilling returns to more normal levels in the U.S.

Form 13H filings are a useful tool, but they are just a tool. Once a diamond is extracted from the earth it still has to be cut and polished. When you find out that an investor has purchased a stock that interests you, it is just the starting point. You must do the homework and make sure that stock fits your investing approach, time frame and risk levels.  Steal coal, but polish your own diamonds.

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