A Fresh Batch of Hedge-Fund Picks

 | Jul 20, 2013 | 1:30 PM EDT
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While it's unwise to blindly follow any hedge fund's picks, it's certainly useful to comb through them and pick out names worthy of further research. Among other things, we've found that the most popular small-caps among hedge funds generate an excess return of 18 percentage points per year, on average. So, with that in mind, let's take a look at the June-quarter disclosures from Fisher Asset Management -- billionaire Ken Fisher's vehicle -- as revealed by the fund's 13F filing with the SEC. (Picks from previous filings can be found here.)

To begin with, Fisher's two largest single-stock holdings were large healthcare companies. The fund held on to its position in Johnson & Johnson (JNJ), keeping its holding about constant at a little over 10 million shares. Yet, thanks to J&J's climbing stock price, the stock became Fisher's largest position by market value -- and lowered the stock's dividend yield to 2.9%. Still, with a beta of 0.4, J&J remains a potential pick for defensive investors. Meanwhile, the forward price-to-earnings ratio is 16x. However, this is based on analyst expectations of earnings-per-share growth next year, even as recent reports have shown a small dip in net income.

The other large healthcare name was Pfizer (PFE), which underperformed J&J during the second quarter and brought it down a spot in the fund's portfolio. Pfizer has been selling off a good deal of its noncore assets and, in part due to these activities, it has managed to put in sizable earnings growth. The stock currently trades at 14x trailing earnings, and it's also possible a more focused business will allow Pfizer management to improve operations and increase shareholder value. At current prices and dividend levels, Pfizer pays out an annual yield of 3.3%.

Fisher and his team also reported a position of nearly 11 million shares in American Express (AXP), whose first quarter saw only modest year-over-year growth on the top and bottom lines. Nonetheless, markets appear optimistic about growth prospects: The trailing earnings multiple is 20x, which is actually a discount to leading credit card brands MasterCard (MA) and Visa (V). However, those two companies are more focused on the credit-card business (AmEx is also a travel-services firm), and they've been delivering higher growth rates. As a result, we would avoid AmEx.

Fisher Asset Management also owned more than 18 million shares of Wells Fargo (WFC) at the end of June. The price-to-book value here is an expensive-looking 1.6x -- for many other megabanks, shares trade at book value or lower. The earnings multiples make Wells Fargo look more like a value play, as they are in the 11x-to-12x range. But, on a forward-earnings basis, this still represents a premium to its peers. In Wells Fargo's defense, earnings did grow 19% year over year, and the firm does have a reputation as a safer bank.

Rounding out our list of the fund's top third-quarter picks is General Electric (GE). This company's net income has been rising, but this has been entirely due to improved margins -- most recently, sales were actually down slightly vs. the prior year. The financial community seems to expect earnings to continue to grow, as the trailing and forward P/Es are 17x and 13x, respectively. But, least for now, we would be somewhat skeptical: Bottom-line growth is being driven entirely by expanding margins, which shouldn't be sustainable for very long.

-- Written by Matt Doiron

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