A Look at What the Big Boys Have Been Buying

 | Sep 20, 2012 | 9:30 AM EDT  | Comments
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Stock quotes in this article:

odp

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fst

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roc

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mtge

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hznp

Hedge funds and other notable investors must file with the Securities and Exchange Commission when they take a large position in a stock, and then again when they significantly increase or decrease that position. It allows investors to track these filings and to search for investment ideas from these top managers, which make sense on their own merits. Here are five large recent purchases by hedge funds:

1. Jeffrey Smith's Starboard Value now owns more than 10% of the outstanding shares of Office Depot (ODP) following some large purchases this month. The stock climbed some 7% on the announcement, but still trades at less than 7x trailing earnings, as investors are skeptical that the market can support a variety of brick-and-mortar office supply stores alongside Internet players. Last quarter, for example, the company reported a steeper loss than analysts had expected. The sell side expects only $0.08 per share in earnings for 2013, which implies a forward price-to-earnings multiple of 33x.

2. SAC Capital Advisors, run by billionaire Steve Cohen, owned 6.4 million shares of oil-and-gas exploration-and-production company Forest Oil (FST) as of its latest filing. Forest Oil's revenue and earnings were down last quarter year over year, and the company recorded a net loss due to a writedown of some of its assets. Given the decline in its business, the company has announced that it will reduce its capital expenditures. As a result, and combined with a history of earnings misses, the market drove the company's share price down as low as $6 before it started to recover. Forest Oil is also a widely shorted stock: 23% of its float is held short, according to recent data. SAC may be looking at the stock as a value play, or it may simply be looking to benefit from a short squeeze.

3. Alexander Roepers' Atlantic Investment Management has picked up 3.9 million shares of specialty-chemicals company Rockwood Holdings (ROC), giving it 5.1% of the company's shares outstanding. Atlantic had been buying shares of the company for the entire year, starting 2012 with a position of 600,000 shares and increasing that stake in both the first and second quarters. Rockwood saw year-on-year declines in revenue and operating income last quarter, as the company is highly exposed to Europe and to the global economy in general. It trades at trailing and forward P/E multiples of 9x and 11x, respectively -- so if it can keep its business steady from this point on, it could be a value play.

SAB Capital Management, managed by Brian Jackelow, reported a 10% stake in American Capital Mortgage Investment (MTGE). This position of 4.7 million shares is about 50% more than what the fund owned at the end of June. American Capital Mortgage is a real estate investment trust with $960 million in market capitalization, and it is appealing from a growth perspective. Our analysis of the company shows that it has seen enormous growth of funds from operations over the last year. (FFO is a common income measure used for REITs.)

Finally, Farallon Capital Management disclosed a position of 1.9 million shares in biopharmaceutical company Horizon Pharma (HZNP), which offers two treatments for rheumatoid arthritis. Horizon has only a $160 million market cap, but has good trading volume, with well over $2 million changing hands daily. Horizon is expected to report net losses this year and next, though its revenue has been growing as its drugs have moved into the market. The stock had a big run-up earlier this year, roughly doubling in price in June, but has since fallen back close to its original price.

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