We regularly analyze 13F filings from hedge funds and other notable investors, which folks can also use to find out the stocks top managers have added to their portfolio during any given quarter. Investors can treat these names as free recommendations -- and, while it's not usually a good idea to blindly follow anybody, it's useful to take a closer look. Billionaire Dan Loeb's Third Point is one fund that recently filed its 13F for the fourth quarter so let's go over the fund's five largest new positions by market value.
Loeb and his team bought 7 million shares of News Corp (NWSA), which is in the process of breaking into two separate companies. The breakup has attracted the attention of many investors -- this is very similar to a spinout, which is generally thought to provide potential efficiencies from improved management. Interestingly, News Corp's earnings multiples are in the teens currently, so the valuation is actually not pricing in much of an improvement there. The breakup is certainly complicated, but it could be worth further research.
Oil-and-gas refiner Tesoro (TSO) was another of Loeb's new picks, with a year-end reported position of about 3.7 million shares. Tesoro's price has nearly doubled in the last year, yet still trades at only 10x trailing earnings. Wall Street analysts expect significant earnings growth in the next few years, making for a forward price-to-earnings ratio of 9x and a five-year P/E-to-growth (PEG) ratio of 0.7. The stock looks even cheaper in terms of cash flow: enterprise value to earnings before interest, depreciation and amortization comes to 3.7x. In sum, all of these multiples look quite good, so this is another company about which we'd be interested in learning.
Third Point also added Morgan Stanley (MS) to its portfolio. Morgan Stanley has a high beta of 2.2, so it would not be a good choice for investors worried about a broad-market downturn. Analyst consensus for 2014 does imply a forward-earnings multiple of only 9x, and revenue has been rising, according to recent earnings reports. But the company has been struggling on the bottom line recently, and it might be best to wait for some of these improved results to translate here.
Equinix (EQIX), a telecom name with $10 billion market capitalization, was another new stock pick for the fund. Equinix has been delivering high earnings growth, but quite a bit of improvement is already priced in: The trailing and forward P/E multiples are 72x and 41x, respectively. True, it has tended to beat earnings targets by a considerable margin over the past several quarters -- but, even assuming high growth, we would generally be hesitant to recommend a stock with that high a valuation. We would note that 15% of the outstanding shares are held short.
The fifth largest new holding in Loeb's portfolio was Herbalife (HLF). Billionaire Bill Ackman of Pershing Square made a high-profile case for shorting Herbalife that drew a defensive response from the company and a passionately aggressive one from Carl Icahn. The Third Point team was apparently not convinced that Herbalife is a pyramid scheme -- or, at least, they have concluded that the company will be able to sustain its current level of earnings for several years. Herbalife is still down from where it was trading before Ackman's presentation, though it is well off its lows.
-- Written by Matt Doiron