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Hedge Funds Love Advance Auto, Starbucks and More

March 19, 2013 | About:

After reviewing the hedge fund filings for last quarter, there are five stocks that stood out as being loved by hedge funds. The hedge fund activity in these five stocks were flagged as "unusual" in the sense that they saw a number of major investors that have to disclose their holdings to the SEC quarterly upping their stakes in the company. A few are "under the radar" picks and lesser known to conventional investors, but worth checking out.

Williams Companies Inc. (WMB) is an energy infrastructure company in North America focused on natural gas and natural gas liquids. There are five hedge funds and major investors with Williams in its top 10 (as measured by portfolio weighting). There were also 20 investors increasing there positions last quarter. The top hedge fund owner is Viking Global, who has 4.6% of its portfolio invested in the company. Also, the second and third hedge fund owners, Senator Investment and Corvex Capital, increased their stakes by over 150% each during the fourth quarter (see all the hedge funds owning Williams).

One draw to this company is that it can generate solid cash flow and dividend growth for investors. Earlier this year, Williams boosted its annual dividend payment 4.2% and it now yields 3.9%. Management has vowed to continue creating value for shareholders, which includes its commitment to grow its annual dividend by 20% over the next few years.

Following its 2012 spinoff of its exploration assets, WPX Energy, Williams is now a pure-play midstream operator with assets ranging from Canadian oil sands to deepwater operations in the Gulf of Mexico. Its key market is natural gas, which I am positive on given the move toward alternative energies, including recent news that billionaire Warren Buffett's BNSF might be looking to use natural gas to power its rail cars.

Advance Auto Parts Inc. (AAP) is one of the largest auto parts retailers in the U.S. Advance had 5 major investors with the company in its top 10, and 17 investors upping their stakes. Some of Advance's recent initiatives to differentiate itself from other auto parts retailers includes store remodeling and nationwide advertising campaigns.

Advance is also one of the cheapest auto parts retailers in the industry.

Price to Sales

  • O'Reilly 1.96x
  • AutoZone 1.67x
  • Advance Auto Parts 0.93x
Price to Operating Cash Flow

  • O'Reilly 16.7x
  • AutoZone 12.5x
  • Advance Auto Parts 10x
Valeant Pharmaceuticals International Inc. (VRX) is a specialty drug maker, a combination of the 2010 merger of Valeant Pharmaceuticals and Biovail, then the 2012 acquisition of Medicis Pharmaceutical. The Medicis deal is expected to generate synergies and be accretive to 2013 earnings.

This pharma company had six major investors with the company in its top 10. A few notable hedge fund owners include ValueAct, which had 13.3% of its portfolio invested in the company and owned 17.5 million shares. As well, Janus Capital owned 3.8 million shares and Iridian Asset 3.5 million.

One intriguing aspect is the drug company's diversified revenue portfolio. The company has five segments: U.S. neurology, U.S. dermatology, Canada and Australia, branded generics in Europe and branded generics in Latin America.

Starbucks Corporation (SBUX) is the coffee giant and another of the popular stocks among hedge funds last quarter. There were 19 major investors upping their stake last quarter, and five had the coffee company in their top 10. The largest hedge fund owner is billionaire Steve Cohen of SAC Capital, this after upping his stake 124% last quarter. Jim Simons and RenTech also took a new position last quarter.

Investors have taken notice of the historically low coffee prices, assuming that it will bode well for the company's operating performance, yet Starbucks has the ability to keep operating margins high regardless of coffee prices (read how here). Other items lifting the stock have been solid earnings results; last quarter, Starbucks managed to post EPS results of $0.57, versus $0.50 for the same quarter last year. This was on the back of global same store sales growth of 6% year over year.

Despite being one of the most recognized names in the coffee industry, the company is also focusing on "alternative" beverages with the 2011 purchase of Evolution Fresh and another key move could be Starbucks' purchase of Jamba Juice (read more here).

Barrick Gold Corporation (ABX) was another popular stock among hedge funds last quarter, despite the fourth quarter decline in gold prices.

There were four investors with Barrick in their top 10, and 16 major investors upping their stakes during the fourth quarter. Major hedge fund investors upping their stakes include First Eagle Investment and Vinik Asset, whereas billionaires D.E. Shaw and Jim Simons are also major shareholders.

Assuming the gold bull market continues, thanks to global economic uncertainty and loose monetary policy by central banks, gold miners should perform well over the interim. The gold miner has a relatively geographically diverse product stream, with around 40% of reserves in North America, 40% in South American and 10% in Australia and Africa each. The gold miner also pays a 2.7% dividend yield.

Don't Be Fooled

It appears that hedge funds and other notable investors are encouraged by the initiatives that Williams has made to return capital to shareholders, a steady income play with an almost 4% dividend yield. In addition, Advance is a solid play on the rising age of cars on the road being on average over 11 years old. Advance is the biggest and quite possibly the best auto retailer.

Valeant could prove to be a robust growth play in the pharma space, while Starbucks is undoubtedly a solid play on the coffee industry. What I believe to be one of the best bets among the five is the gold miner Barrick Gold. This gold company should continue to perform well amidst low interest rates and an uncertain global economy.

Be sure to check out our detailed stock analysis (click here).

About the author:

Investment adviser and startup striver.

Visit mdhargrave's Website

Rating: 3.3/5 (3 votes)


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