Hedge funds’ third-quarter 13F filings have been released this past week, and they contain some interesting information, especially regarding the most significant buys and sells.
These forms are a great place to start for further research, but should not be viewed as endorsements to buy or sell. They only account for each hedge fund’s equity portfolio and do not include cash, debt or other asset holdings. Also, the forms are backward-looking, so the actual portfolio may have changed since the initial purchase was made.
Company merger
The most purchased stock during the quarter by value funds was DowDuPont Inc. (DWDP, Financial). On the surface, it may appear as if it has suddenly become a highly attractive stock, with managers clamoring to buy. Daniel Loeb (Trades, Portfolio)’s Third Point, Nelson Peltz’s Trian Fund Management, Lee Ainslie (Trades, Portfolio)’s Maverick Capital, Leon Cooperman (Trades, Portfolio) and Tom Russo (Trades, Portfolio) all established stakes during the quarter. However, the merger of equals between The Dow Chemical Co. and E.I. du Pont de Nemours & Co. became effective at the end of September, and this seemingly new position just reflects a change in the combined company’s structure.
The second most popular position for the quarter was Visa Inc. (V, Financial). This stock was brought by five funds, including Chuck Akre (Trades, Portfolio)’s Akre Capital, John Griffin (Trades, Portfolio)’s Blue Ridge, Ainslie’s Maverick Capital, Tom Gayner (Trades, Portfolio) and Russo. Three funds reduced their positions marginally. With 4.9 million shares, Akre Capital is the most substantial holder after Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), which owns 10.6 million shares.
Consumer value
After losing nearly a fifth of its market value between the beginning of the year and the end of the third quarter, The J.M. Smucker Co. (SJM, Financial) attracted the attention of five value funds, making it the third most popular stock for the quarter.
It is easy to understand why this consumer-focused business attracted investors' attention. After falling out of favor with the market, shares fell to a profoundly depressed valuation that looks too good to pass up even after recent gains. The company is currently trading at a forward price-earnings (P/E) ratio of 14.7, compared to the Food and Tobacco Industry average of 20. The EV/EBITDA ratio is currently 12.9, compared to the industry average of 14.6. Earlier this week, the company unveiled a 10% increase in operating profit for the third quarter and 13% increase in earnings per share to $1.7 off the back of higher margins and a 1% increase in sales.
Comcast Corp. (CMCSA, Financial) was the fourth most acquired stock by value funds during the quarter and O'Reilly Automotive Inc. (ORLY, Financial) took the fifth spot.
Bottom fishing
O’Reilly attracted the attention of David Abrams (Trades, Portfolio)’ Abrams Capital Management, Akre, Griffin and ClearBridge Value Trust. Ainslie’s Maverick Capital scaled back its position.
O’Reilly lost around 20% of its market value in a single day at the beginning of July. If these funds acted quickly, they could already be sitting on gains of 27%. This is hardly a value play as the stock trades at a forward P/E of 16.9, slightly above the sector average. Regardless, O’Reilly has a record of creating value for investors.
Over the past six years, normalized earnings per share have expanded at a compound annual growth rate of 23% as net profit has risen by 15.4% per annum and the company has reduced its number of shares outstanding by 7% p.a. (another $1 billion share repurchase authorization was just approved). Meanwhile, return on capital employed has risen from 21% p.a. to 44.7% p.a.
O’Reilly’s stock came under pressure due to concerns over the company’s outlook and its ability to compete with the likes of Amazon (AMZN, Financial). For the time being, it looks as if it is business as usual for the company and it seems value funds are betting this will continue.
Disclosure: The author owns no stocks mentioned.
