Recently, billionaire Richard Perry's Perry Capital filed its 13F for the second quarter of 2013 with the Securities and Exchange Commission, disclosing many of the firm's long equity positions as of the end of June.
We track 13Fs as part of our work developing investment strategies. Our research has shown that the most popular small-cap stocks among hedge funds generate an average excess return of 18 percentage points per year, and our own portfolio that uses these techniques has outperformed the S&P 500 by 33 percentage points in the last 11 months.
At the beginning of July, Perry Capital owned almost 12 million shares of American International Group (AIG). The insurer's share price has been improving this year, but the stock still trades at a price-to-book-value ratio of 0.7. AIG has also been selling off many of its assets, and in the eyes of many analysts, this will allow the company to focus on its core business. The sell side's expectations of improvements on the bottom line next year imply a forward price-to-earnings ratio of 11, and AIG is a possible value stock for investors in the finance and insurance sector. AIG had been one of the most popular stocks among hedge funds during the first quarter.
Perry's fund initiated a position of 3.9 million shares in FedEx (FDX) between April and June of this year. Higher transportation costs and other rising costs resulted in FedEx's earnings dropping 23% in its last fiscal year compared with a year earlier -- the decrease was more than 40% for its fiscal fourth quarter, despite increases in revenue. This has left the stock valued at 22x its trailing earnings, but Wall Street analysts expect the company to recover next year. The result is that the forward earnings multiple is only 13. It seems best to wait and see if FedEx's costs are in fact under control. The Bill and Melinda Gates Foundation had a $300 million position in the stock at the end of the first quarter.
Lamar Advertising (LAMR) was another of Perry's top picks; the filing discloses ownership of 6.3 million shares. Lamar operates billboards and other public display advertising spaces, and it has been planning to convert to a real estate investment trust. Because REITs receive favorable tax treatment as long as they distribute a large share of taxable dividends, this conversion would create shareholder value, and it has driven the stock price up above what is supported by fundamental earnings numbers. However, as an REIT, Lamar would be evaluated in terms of funds from operations rather than GAAP earnings. Ray Dalio, Steven Cohen, Larry Robbins and David Abrams are bullish about the stock.
Perry and his team had 3.2 million shares of Hess (HES) in their portfolio at the end of the second quarter. Hess is planning to spin out its downstream operations to become more of a pure-play exploration-and-production company, as other larger energy companies such as ConocoPhillips (COP) and Marathon (MRO) have done in the last few years. Hess trades at 13x forward earnings estimates, a small premium to some large integrated oil and gas companies, as markets expect Hess's operations to become more efficient after the spinout. Billionaire Paul Singer's Elliott Management is a large shareholder in Hess, and he had been pushing for divestment of the downstream business.
The 13F showed Perry with a significant position in J.C. Penney (JCP), and more recently the fund has filed a 13D to report a stake of 16 million shares, or 7.3% of the company. The retailer, which is down nearly 40% year to date, with double-digit percentage declines in revenue from a year ago, still needs a turnaround. In the battle between longtime J.C. Penney activist shareholder Pershing Square (managed by billionaire Bill Ackman) and the board, Perry appears to agree with Ackman that the company should replace the chairman of the board and quickly find a new CEO.
