Three Stocks That Billionaires Love

 | Sep 10, 2013 | 3:00 PM EDT
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Our database shows that Apple (AAPL), which has long been one of the most popular stocks among hedge funds, was only the fourth most popular stock at the end of June among billionaire hedge-fund managers. So far this year, a number of funds have been dumping Apple, even as the company slowly moves toward a more generous cash-return strategy.

For example, in the second quarter of 2013, Tiger Global, which includes billionaire Tiger Cub Chase Coleman among its managers, dumped its entire position of 260,000 shares in Apple. Instead, billionaires are piling into a large bank, a consumer stock and a tech rival, and their most widely owned pick has a market cap of only about 11% of Apple's. Here's why we believe billionaires love these three stocks.

The most widely owned stock among billionaires was Citigroup (C). Conditions in Europe have stabilized somewhat, and since large U.S. banks are generally doing well, Citigroup's net income grew by just over 40% last quarter compared with the second quarter of 2012. This has helped drive the stock price up 57% in the last year, but even so, Citigroup is still valued at a discount to the book value of its equity with a price-to-book ratio of 0.8. Wall Street analysts also consider it a value play in earnings terms: Its forward P/E is only 9.

In its most recent quarterly report, Citigroup attributed its better financial results primarily to high growth worldwide in its securities and banking division -- its commercial and investment-banking business. Corporate expenses also fell 13%. Consumer banking was actually flat and included a small decline in operating income for the U.S. Billionaire David Tepper's Appaloosa Management reported a position of 9.6 million shares in Citigroup in that fund firm's most recent filing.

Seventeen of the billionaires whose funds and investment firms we track were long General Motors (GM) at the end of second quarter, and Warren Buffett's Berkshire Hathaway raised its stake in the automaker by 60%. Billionaire David Einhorn of Greenlight Capital laid out the three-pronged long case for General Motors last fall: Europe will recover over the next few years to the point where GM's operations there become profitable, the company has a market-leading position in the potential growth market of China, and the average age of U.S. consumer cars had climbed to 11 years, suggesting a good deal of pent-up demand.

For the U.S. auto market as a whole, sales climbed more than 15% in August from a year earlier. General Motors' own sales are up nearly 10% year to date as slower growth in cars is offset by strong performance in light trucks. The stock currently trades at 13x trailing earnings, so even modest growth in profits could make the stock a good value. Sell-side analysts are bullish here as well: Their forecasts imply a five-year price/earnings-to-growth ratio of well below 1.

Google (GOOG) rounds out our list of stocks which billionaires prefer to Apple. Google was billionaire Stanley Druckenmiller's largest holding after he more than doubled his ownership of the stock between April and June. Markets have already priced in a good deal of growth at Google, which has a trailing P/E of 26, so why do so many billionaires believe it is still a buy? First, the market cap includes $54 billion in cash and marketable securities against only $2 billion in long-term debt; if we account for that $52 billion in net cash, we get an adjusted P/E of 21.

Also, Google continues to deliver high growth. Its core advertising business increased its revenue by 20% in its most recent quarter from the same period in the previous year. Even though costs are also increasing, investors believe that the search business will continue to be a star performer and that Google will manage more cost cuts and synergies from the integration of Motorola Mobility. Again, analysts are optimistic: Their consensus is for over $51 in earnings per share for 2014. If the company hits that target, then the forward P/E multiple -- again, adjusted for cash -- would be in the 14-15x range.

There are a number of ways that investors can take advantage of 13Fs, which effectively turn even the most successful fund managers into the retail world's unpaid interns (even if their picks are sometimes a bit delayed). Citigroup and General Motors are two billionaire favorites which seem quite competitive in value terms, although we'd note that the thesis for these stocks could generally apply to the banking and auto industries more generally, and so investors may want to consider these stocks' peers as well. Google is certainly not a pure value stock, and even adjusting for the cash, investors are counting on high earnings growth there. As a result, we would be a bit more cautious, though it's interesting to note that this stock is more widely owned by billionaires than Apple.

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