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Insider Monkey HF Newsletter Q3 2012 Issue:2 Inside This Issue 1 Why Track Hedge Funds 3 22 Billionaire Fund Managers 47 Most Popular Stocks Among Hedge Funds 54 Least Popular Stocks Among Hedge Funds 57 15 Picks by Insider Monkey’s Secret Strategy 57 15 Stocks That are Dumped by Hedge Funds 58 In-depth Look: Stock 1 59 In-depth Look: Stock 2 61 In-depth Look: Stock 3 63 In-depth Look: Stock 4 64 In-depth Look: Stock 5 65 In-depth Look: Stock 6 Don’t pay hedge funds hefty fees when you can buy the best stock picks of best hedge fund managers at a fraction of what they charge A Gift To You From Insider Monkey Please enjoy the first half of our newsletter, as a gift from us to you. In it you'll find extensive analytical discussions on the nation's best hedge fund managers. If you like what you see, you have a few options to get more and better information. Become a Newsletter Subscriber and access to our two strategies' stock picks. Here's what the subscribers of the newsletter fared with the picks from last quarter: The Small Cap Strategy gained an average of 4.2% between the end of August and November 16th. During the same time period S&P 500 index ETF (SPY) lost 2.9%. Our “Secret” strategy lost an average of 0.9%, also beating the SPY by 2 percentage points. The real value in the newsletter lies in the stock picks of the two investment strategies developed by our Ph.D. quant research director. These two strategies beat the market by nearly 20 percentage points per year on the average in a 10-year backtest. You can find out our new stock picks by becoming a premium subscriber. We have a 30-day money back guarantee, so hurry up and take advantage of our limited time offer. the strategy that invests in the most popular small cap stocks Why Track Hedge Funds Hedge funds charge 2% of assets and 20% of returns because they historically managed to deliver above average performance. However, hedge funds' alpha overall has been declining over the past decade and will probably disappear soon. The reason is simple. As they manage more and more money, they have to buy less and less attractive stocks. Most hedge fund managers have a few great investment ideas. They overweight these stocks and fill up the rest of their portfolio with mediocre stock picks. Insider Monkey thinks investors would be better off by imitating the best stock picks of the best hedge fund managers than paying them around 40% of gross returns. This issue is licensed to the Insider Monkey account owner associated with [email protected] Hedge Fund Alpha The Best Stock Picks of The Best Hedge Funds Hedge 2 Fund Alpha Why Track Hedge Funds In this newsletter, you'll find analysis of hedge funds’ latest 13F filings and a list of their best ideas. Our proprietary ranking methodology helps determine who the best hedge fund managers are. You'll also see a summary of our quarterly findings in an easy to understand format and actionable investment ideas. Hedge fund industry has shown tremendous growth over the past three decades, and for good reason. People who know how to invest invented this mechanism to extract as much value as they can from their talent. Hedge fund managers enriched themselves by delivering positive risk adjusted returns. Alpha is the terminology used to Hedge funds start to invest in their 35th best idea as their assets under management swell. This dilutes their alpha and in some cases measure a fund manager’s stock picking ability. Historically hedge funds delivered high alpha especially when compared to the mutual fund industry. This success attracted more and more funds from investors who didn’t want to be left out. As hedge funds assets began to swell, they started to invest in “ideas” that they are less comfortable with. They also allocated a higher percentage of their portfolio to larger-cap stocks which are relatively more efficiently priced. It isn’t delivers huge surprises surprising that hedge funds’ alpha has been on a declining trajectory to them. for the last decade. Some of most recent studies even claim that an “average” hedge fund doesn’t have alpha anymore. This should be alarming for hedge fund investors. Hedge funds are becoming like mutual funds. Not generating any alpha doesn’t mean that hedge fund managers are losing their stock picking abilities. There are two issues here. The first issue is the adverse selection problem. People with no stock picking ability have enormous incentives to launch hedge funds. If they get lucky, they will make millions. If they don’t get lucky, investors will lose, not them. The second issue is the fact that hedge funds start to invest in their 35th best idea as their assets under management swell. This dilutes their alpha and in some cases delivers huge surprises to them. So why do we track hedge funds? Because we are interested in the “best stock picks of the best hedge fund managers”. A typical manager has a small number of good ideas. They give higher weight to these ideas in their portfolios. The remaining positions are large in number but small in weight. These positions help fund managers to diversify, deploy more capital, and extract higher management fees. Academic studies have shown that fund managers’ best ideas manage to beat the market by as much as 7 percentage points annually. This newsletter aims to follow these studies and our in-house research to pick stocks that can beat the market on the average over the long run. This issue is licensed to the Insider Monkey account owner associated with [email protected] Hedge Fund Alpha 3 Warren Buffett - Berkshire Hathaway New Positions -Deere & Co (DE) -Precision Castparts (PCP) Increased Positions -Wells Fargo(WFC) -General Motors (GM) Reduced Positions -Visa (V) -Kraft (KFT) Sold Out -CVS (CVS) -Dollar General (DG) Brief Discussion: Warren Buffett and Berkshire Hathaway are going down in history, so investors should keep an eye on their investment activity as long as possible and drill into the activity as much as possible. Here are a few trends which we think are worth paying attention to: New positions in Deere & Company (DE) and Precision Castparts (PCP) along with massive cuts to General Electric (GE), Johnson & Johnson (JNJ), and United Parcel Service (UPS) were disclosed. All in all, it's Buffett's position in Precision Castparts that may be the most under the radar, as Bloomberg had reported earlier this year that the investor was considering a stake in Deere. Both newly established positions are a welcome sight for each company's shareholders. Berkshire's total investment in Precision Castparts, a metal fabrication and industrial goods manufacturer, amounts to 1,248,901 shares worth an approximate $216.4 million. Meanwhile Deere now accounts for close to 5% of Buffett's total 13F portfolio, at an estimated market value of $337.2 million. The size of Buffett's investment in Deere puts the company in Berkshire's top ten holdings, above such stalwarts as ConocoPhillips and DirecTV. At the moment, it looks like it wouldn't be a bad idea for individual investors to mimic, or "monkey", Buffett into the agricultural machinery company, as it trades at rather attractive trailing (11.3X) and forward (10.2X) earnings multiples. Both valuations are below Deere's historical average by 30%-40%, and revenues also trade at a discount. Deere is expected to see its EPS grow by an average rate of 8.9% a year over the next half-decade, though this is nearly half the rate of expansion the company has maintained post-recession. In its most recent earnings report, Deere missed the Street's forecast by nearly 15%, as slowing overseas sales and production line delays hurt both top and bottom line financials. In the nearly three months since the release, however, the stock has risen nearly 6%, possibly a partial result of Buffett's bullish behavior. Deere is a value play through and through, but needs to impress with its fourth quarter earnings to avoid a late-year decline. Sell-side analysts expect Q4 EPS to come in at $1.87, up 15.4% year over year. Deere reports Q4 financials on November 21st. Precision Castparts meanwhile has been up close to 7% over the past month, as the company recently bought Titanium Metals Corp. for close to $2.9 billion. Titanium Metals, one of the largest producers of titanium in the world, will add a significant amount of "value creation" to Precision, according to the company's CEO Mark Donegan. Interestingly, Titanium Metals has become an increasingly large supplier to aerospace manufacturers like Boeing, as titanium's usage in this industry continues to increase. Precision Castparts had also dabbled in this arena, producing entire aero-structures for a few major players, but the addition of Titanium Metals should shore up this segment of its business. Precision currently trades at an attractive forward P/E below 13.0X, but has disappointed the Street's earnings expectations in four of the past five quarters. We like the company because of Buffett's endorsement and its recent acquisition. This issue is licensed to the Insider Monkey account owner associated with [email protected] Hedge Fund Alpha 4 Warren Buffett - Berkshire Hathaway New Positions -Deere & Co (DE) -Precision Castparts (PCP) Increased Positions -Wells Fargo(WFC) -General Motors (GM) Reduced Positions -Visa (V) -Kraft (KFT) Sold Out -CVS (CVS) -Dollar General (DG) Brief Discussion: Berkshire downsized its positions in GE, Johnson & Johnson, and UPS quite significantly.
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