Hedge Funds Focus on Consumer Goods

 | Sep 30, 2013 | 3:00 PM EDT  | Comments
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Quarterly 13F filings can tell investors a multitude of things about hedge funds' historical stock picks, but there's another, lesser-used way to parse down the data. By grouping filers' long holdings according to sector we can begin to understand the smart money's entire consciousness.

Call it sentiment, consensus or whatever -- it's going to give you insight as to where the world's richest investors are placing their assets in the equity market. In previous quarters, we've seen hedge funds have a penchant for technology, a love of insurance providers and even an obsession with banking stocks that trade at low price-to-book values.

In the latest round of filings from the second quarter, though, hedge funds are homing in on the consumer goods sector. According to our analyses at Insider Monkey, each company in the consumer goods sector had an average of 14.8 elite hedge funds invested last quarter. The least popular sector was financials, with an average of fewer than 8 hedge funds per company.

As is usually the case in the hedge fund industry, there were a few stocks that stood out in particular within the consumer goods sector. They were the bruised but rebounding Apple (AAPL), with long positions from 123 of the hedge funds we track; General Motors (GM), with 122 elite hedge funds long; and Mondelez (MDLZ), with 61 hedge fund bulls.

Apple

If you read our coverage of the entire list of hedge funds' favorite second-quarter stocks last month, you probably recognize Apple and GM. Both are noteworthy for different reasons. Apple, interestingly enough, saw a decline in aggregate interest by about 15% in the second quarter in comparison with the first. Funds such as Tiger Global, T. Boone Pickens' BP Capital and Jorge Paulo Lemann's 3G Capital were just a few of the ones closing on their Apple positions.

On the bright side, two of the most well-known managers remain bullish.

David Einhorn has allocated almost 18% of his entire $5.3 billion equity portfolio to the stock, and although his "iPrefs" idea never took off, he's undoubtedly happy with the dividend hike and increased share repurchase plan Apple has adopted. Carl Icahn is the other big name showing confidence in Cupertino, and his Twitter admission that he plans to sit down with Tim Cook to discuss the "magnitude" of an even bigger buyback is something on every shareholder's radar.

Still, despite the activist gurus that are currently in love with Apple, we tend to be bearish on it. Mutual fund giant Donald Yacktman shares our sentiment, and he actually talked about Apple's primary weakness at the Value Investing Congress earlier this month. Yacktman stated that he thinks Apple isn't as cheap as you think because there's a risk that its present margins are unsustainable in the long run. The fund manager believes Microsoft (MSFT) is a better alternative because its margins are protected, due to generally lower competition in the operating system business. Apple, meanwhile, faces ever-increasing opposition from peers such as Samsung and Google (GOOG), both of which offer products that are fairly close substitutes.

GM and Mondelez

General Motors' stock price has moved in the opposite direction as Apple's in 2013 -- that is to say, upward. The second most popular consumer goods giant among hedge funds last quarter, most investors forget that David Einhorn recommended GM a year ago at the VIC. Since his presentation last fall, GM stock has returned 57.5%.

His thesis was correct that the federal government would seek to sell its stake sooner rather than later, and his assertion that GM's growth in China would be a key strength this year turned out to be on the money. The company set an August sales record in the country last month.

Warren Buffett has also upped his General Motors stake fourfold over the past year. The automaker's 30% discount to industry averages across the board makes it an easy value play in addition to the macro tailwinds.

Mondelez, on the other hand, has exactly half the hedge fund interest as GM, so it's a distant third. More fund managers closed positions than opened them last quarter, and Buffett himself cut his stake in the snack foods company by over 90% during the three-month period. The company's stock price is flat since these filings were made public, and we'll be interested to see how hedge fund bulls such as Boykin Curry and Mason Hawkins have treated it in the next round of 13Fs.

Out of the three, we like GM the best due to the aforementioned factors and think that Apple may actually be a value trap if its margins do deteriorate

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