Friday, January 14, 2011

Analysts' Best Stock Picks For 2011

Raymond James is out with its Analysts Best Picks for 2011 report. We highlighted their picks from 2010 and those performed pretty well with a 22.3% return. In fact, their annual selections have a 10 year average return of 12.4%.

The report details analysis of the fundamentals, growth prospects and risks associated with each stock. They've selected 13 stocks again this year and in alphabetical order, here are the Analysts' Best Stock Picks for 2011:

- Allscripts Healthcare (MDRX)
- Bank of America (BAC)
- CONSOL Energy (CNX)
- Covidien (COV)
- Digital Realty Trust (DLR)
- Equinix (EQIX)
- Halliburton (HAL)
- HealthSouth (HLS)
- Lincoln National (LNC)
- Panera Bread (PNRA)
- Pioneer Natural Resources (PXD)
- Stanley Black & Decker (SWK)

There are some pretty familiar names in that bunch and a few prevalent themes. They've included multiple plays in the health space with MDRX, HLS, and COV. Also, technology is represented with two names in NVDA and EQIX. Also, energy/natural resources are abundant via PXD, CNX and HAL. We wanted to highlight a few of their selections below:

Bank of America (BAC): This name is interesting because it was also on the analysts' best picks list for 2010. However, over the course of last year the stock declined. Raymond James sees the price depreciation as further opportunity and is again a buyer of shares this year. Not to mention, some of the largest hedge funds in the game have sizable stakes in BAC, including John Paulson.

Halliburton (HAL): Arguably, the time to buy this name was during the Gulf oil spill when uncertainty abounded and the stock price was depressed. Yet, RJ feels the company will see near-term earnings momentum and a rebound in international activity. We've talked about how hedge funds are betting on higher oil prices as well.

Equinix (EQIX): This tech name is intriguing because it saw some volatility last year. And as we detailed in our Hedge Fund Wisdom newsletter months ago, a large shareholder (Shumway Capital) was reducing its position size and could be partially responsible for the volatility. Raymond James likes the company's dominant market position in the colocation market and data center industry.

Keep in mind that obviously with the market rally, a lot of these names have been bid up significantly already. Some strategists would obviously advocate waiting to purchase some of these names given that they're extended and knowing that the market doesn't go straight up forever. RJ's Chief Investment Strategist Jeff Saut expects a buyable pullback.

Embedded below is the full research on Analysts' Best Picks for 2011:

You can download a .pdf copy here.

For further research from this shop, head to the previous best stock picks for 2010 as well as Jeff Saut's risk management principles.

What We're Reading ~ 1/14/11

Interview with hedge fund legend Michael Steinhardt [Benzinga]

If you could short Facebook, would you? (read the comments section too) [Reformed Broker]

Eclectica's Hendry bets China will fail [Bloomberg]

We previously covered Hendry's Asian bear portfolio [Market Folly]

Why it's a great time to launch a hedge fund [Fortune]

Signs of a top in the cupcake industry [BarbarianCapital]

Verizon's $100 billion conundrum with Vodafone [WSJ]

Hedge fund manager-diversification versus strategy-diversification [AllAboutAlpha]

Three winning fund managers from 2010 give current investment outlook [WashingtonPost]

Profile of $19 billion Canyon Partners [Bloomberg]

Hedge fund Clarium slumps from peak [Bloomberg]

Thursday, January 13, 2011

Massive Discount to the Value Investing Congress in California

Today we're excited to announce that yet again, Market Folly readers can receive a massive discount to the upcoming Value Investing Congress in California. The event will take place May 3rd and 4th in Pasadena, California at The Langham Huntington Hotel & Spa.

Our readers can save over 38% off with code: W11MF4. This discount expires in one week.

This is literally the largest discount you'll be able to receive. The closer we get to the event, the less discount there is. The last Value Investing Congress in October was a huge success as investors received a ton of actionable investment ideas. For example: Greenlight Capital's David Einhorn said to short St. Joe (JOE) and it plunged over 20%. Maverick Capital's Lee Ainslie presented Commscope (CTV), which received a takeover offer soon after, sending shares up 30%.

The event is full of top hedge fund managers presenting their best stock picks and it is a fantastic networking resource. Click here for a massive discount to the Value Investing Congress. Discount code: W11MF4.

Wednesday, January 12, 2011

Dan Arbess' Xerion Fund: 2011 Investment Strategy & Outlook

Daniel Arbess' Xerion Fund is out with its investment strategy and outlook for 2011. The hedge fund, part of Perella Weinberg Partners, manages $2.3 billion and has annualized returns of 18.97% net since inception in 2003. For 2010, Xerion finished up 12.66% net. Our previous coverage focused on how Xerion likes commodities.

2011 Market Outlook

Taken directly from Xerion's year-end letter to investors, here is a breakdown of their outlook for the new year,

" - Global economy and markets remain unbalanced, dependent on government support and highly vulnerable to policy changes and conflicting national agendas. Government-stimulated market momentum will recede in 2011, in favor of either gradual normalization or renewed crisis.

- Expect continued moderate economic recovery, however frequently punctuated by episodes of macro instability. Key risks include potential over-heating and reversal in China, persistently high domestic unemployment and acceleration of sovereign debt crises in Europe and other developed economies.

- Receding tailwinds from government intervention imply security selection and idiosyncratic opportunity will be most important in 2011. Select U.S. credit opportunities as rising yields signal higher re-financing costs. “Shake Hands With China” with exposure to commodities and equities, industrials and Asian consumer- facing industries. Selective sector opportunities in U.S. Equities. Commodity bias captures both fundamental demand in EM and fiscal crisis hedge in DM."

Portfolio Positioning

Given the above themes, Xerion is positioned cautiously long and they expect U.S. credit opportunities to be limited given the large wave of restructurings over the past two years. In developed markets, they see a few equity opportunities but they still favor emerging market equity plays and continue to play their 'shake hands with China' theme.

Of Xerion's positioning, Arbess writes, "Our portfolio structure and positioning going into 2011 is quite consistent with where it was one year ago - slightly longer and more skewed toward equity strategies versus credit, but also more hedged (which is to be expected given the higher beta and volatility of equities)."

Credit: In this asset class, they're focused on event-driven corporate plays and an opportunistic tilt toward distressed credit. Arbess writes, "we also see M&A as an evolving high yield catalyst for 2011, given that sponsors have cash to use and limited organic growth opportunities, while high yield companies are in the mode of bolstering liquidity and shedding assets to fund creditor friendly actions."

Equities: Xerion is generally cautious on domestic equities and favors high growth plays in emerging markets. Specifically, they are focusing on the rise of China's consumer and how to play that. The hedge fund is concerned with the liquidity of Asian equities in general but is intrigued by the state-owned segment of China's economy. Overall, they continue to favor their 'shake hands with China' portfolio theme.

Commodities: Arbess and his team believe that industrial commodity demand has been in a 'supercycle' since 2004. They like commodities for a couple of reasons, citing that they "benefit from robust and growing fundamental demand from industrializing emerging markets, and also attract financial investors looking for monetary debasement hedge."

In particular, Xerion prefers industrial commodities to even gold, claiming that the latter is less supported by demand and more-so driven by a financial crisis hedge. The hedge fund also likes various equity plays for this theme, specifically the junior resource companies (such as Fortescue Metals Group, Ivanhoe Mines, OGX and HRT).

Concerns In The Coming Year

Xerion rounds out its commentary and outlook by commenting on reasons to be cautious this year:

"For the past two years, markets have rallied in response to government stimulus and the anticipation of an economic recovery. We are cautiously optimistic that strong growth in the developing economies will continue to anchor the global economy in 2011, while improving sentiment in the developed world could potentially unlock cash-laden corporate balance sheets, supporting an investment-led recovery. However, bullish sentiment is already largely priced in. We expect the tailwinds of QE-inspirited rising markets to subside in 2011, further highlighting the importance of security selection, idiosyncratic opportunity and events, and, above all, hedging ever-present macro risks."

In the end, Arbess' hedge fund identifies the following as the key to continued economic recovery:

"The sustainability of global growth in 2011 will be highly dependent on G-20 policy makers’ successfully reining in short-term national interests in favor of longer-term globally coordinated efforts to shore up consumption growth in the EM."

For more on Dan Arbess' hedge fund, head to our past post on Xerion's 'shake hands with China' play.

Tuesday, January 11, 2011

Tiger Global Invests in SEEK Asia, Continues to Play Emerging Markets

Chase Coleman's hedge fund firm Tiger Global has made another private investment, this time in SEEK Asia (a subsidiary of SEEK Limited). The hedge fund reserves a portion of its portfolio for stakes in non-publicly traded companies and we've detailed how they've been focusing on web companies in emerging markets.

Tiger's investment in SEEK Asia is a co-investment alongside the likes of Consolidated Media Holdings (CMJ) and Macquarie Capital. It appears as though the three have invested around $63 million in total. Upon news of this investment, SEEK Asia also recently announced that it has purchased 60% of JobsDB, an online employment company that focuses on Southeast Asia. The purchase price of this stake is $204 million.

To see what else Tiger Global has invested in, head to our analysis in our newsletter.

St. Joe Receives Inquiry From SEC, BlackRock Increases Stake

Since The St. Joe Company (JOE) is now a battleground stock (Bruce Berkowitz versus David Einhorn), it's only fitting that we continue our coverage of the name. Just yesterday, some interesting developments arose that we wanted to highlight.

First, JOE revealed in an 8-K filed with the SEC that the company is the subject of an SEC "informal inquiry into St. Joe's policies and practices concerning impairment of investment in real estate assets."

SEC Inquiry

Shares of JOE plunged almost 10% in after-hours trading yesterday on this news. Market Folly readers will of course recall that Greenlight Capital's David Einhorn is short JOE. His bearish thesis centers largely around the company needing to take impairments and writedowns, the exact issue the SEC seems to be looking into.

The 8-K went on to say that, "St. Joe intends to cooperate fully with the SEC in connection with the informal inquiry. The notification from the SEC does not indicate any allegations of wrongdoing, and an inquiry is not an indication of any violations of federal securities laws."

Einhorn has garnered a reputation as a successful short-seller and it might not be too much of a stretch to suggest that his involvement has piqued the SEC's interest. After all, Einhorn had correctly identified problems at both Allied Capital and Lehman Brothers in the past and profited from his short positions. You can read about his short-selling battle in his book, Fooling Some of the People All of the Time.

BlackRock Boosts Stake

In a separate development involving St. Joe, we also saw an updated 13G filed with the SEC by BlackRock. The money manager has disclosed a 12.59% ownership stake in JOE with 11,668,299 shares, boosting their collective position. This disclosure was made due to activity on December 31st, 2010.

This development is interesting because it brings another large institutional player into the ring. Previously, the main notable JOE long was Bruce Berkowitz's Fairholme Capital, who owns almost 29% of the company. However, Berkowitz is currently in a standstill agreement and can't purchase more shares. Instead, he has joined the company's board. BlackRock's position increase marks a second vote of confidence on the long side of the trade.

Battleground Stock

So now that Berkowitz has BlackRock for company, the two major shareholders will square off against David Einhorn and a bevy of other short-sellers, including Whitney Tilson's T2 Partners, among many other hedge funds who have undoubtedly not disclosed their position (yet). With word of the SEC's informal inquiry, the short sellers have delivered another potential blow to JOE longs. What comes out of the inquiry, though, remains to be seen.

Monday, January 10, 2011

Hedge Funds Reduce Equity Exposure to 25% Net Long

It's been a while since we last checked in on the latest hedge fund exposure levels so today we present Bank of America Merrill Lynch's Hedge Fund Monitor. To start the new year, they estimate that long/short equity hedge funds have further reduced exposure to now just 25% net long. Historically, average equity exposure has been 35-40% net long equities.

The last time we saw hedge funds reduce risk assets in late October, the market fell around 3.6% about a week later. Maybe it was a bit of luck with market timing, but it seems as though hedge funds in general have been ahead of the curve with their recent maneuvers.

After the market's furious rally over the past few months, it's clear that some managers think the equity market is overbought in the short-term and expect a pullback. However, many strategists like Jeff Saut believe dips should be bought.

Looking through current hedge fund trades across asset classes, there are a few notable plays that stick out. First, hedgies continue to hold crowded long positions in soybeans and corn. Crude oil and Copper are also crowded net long plays in the commodities spectrum. And turning to forex, we see that hedge funds have pressed their shorts against the Euro. Last, in interest rate plays, managers hold a crowded net short in the 10-Year notes.

Long/Short Equity

As mentioned above, the l/s equity strategy has seen a sizable reduction in net long exposure as funds lock-in gains. These hedge funds still favor large cap names (with a preference of growth over value).

Market Neutral

Interestingly enough, market neutral funds not have around 5% net short exposure. This comes after they spent the majority of 2010 with net positive market exposure. These funds have shifted from growth plays to value.

Embedded Below is Bank of America Merrill Lynch's Hedge Fund Monitor:

You can download a .pdf copy here.

So it seems that hedge funds continue to favor commodities here as inflationary plays. A month ago, we detailed that Dan Arbess' Xerion Fund preferred commodities. John Burbank's Passport Capital also favors hard assets.

It's clear hedge funds are protecting some of their gains from the equity rally as exposure has been reduced further. Hedgies reduced risk assets right before the last market decline, so we'll have to see if they've sent another warning sign with their latest reduced exposure.

David Tepper Buys Dean Foods (DF)

David Tepper's hedge fund firm Appaloosa Management has started a brand new position in Dean Foods (DF). Per a 13G filed with the SEC, the hedge fund disclosed a 7.35% ownership stake in DF with 13,396,536 shares due to trading on December 28th, 2010. The majority of shares are held in Appaloosa's Palomino fund. You can view Appaloosa's other investments in our newsletter, Hedge Fund Wisdom.

Shares of Dean Foods spiked over 11% on Friday as Appaloosa disclosed its stake. The company's shares have been on somewhat of a gradual death spiral, down 45% over the past year. In the near-term, it seems as though the company is being squeezed by input costs (namely commodities). Whether Tepper and his team see this as a value play remains to be seen, as no clear thesis has been revealed. Or, maybe this trade simply falls under his 'don't fight the Federal Reserve' trade. After all, in September Tepper said he likes equities here.

Per Google Finance, Dean Foods is "a food and beverage company. The Company operates through two segments: Fresh Dairy Direct and WhiteWave-Morningstar. Fresh Dairy Direct, formerly DSD Dairy, is a processor and distributor of milk and other dairy products in the United States, with products sold under more than 50 local and regional brands and a range of private labels."

To see what Appaloosa and other hedge funds have invested in, read up on their plays in our newsletter.

TPG-Axon Capital Reduces International Paper (IP) Stake

Dinakar Singh's TPG-Axon Capital Management recently filed an amended 13G with the SEC regarding shares of International Paper (IP). Due to portfolio activity on December 31st, TPG-Axon disclosed a 1.4% ownership stake in IP with 6,300,000 shares.

This marks a decrease in their position as Singh's firm owned 14,270,005 shares back in the third quarter. Over the course of three months, they've decreased their position size by almost 56%.

The hedge fund firm also filed a separate 13G on shares of Zhongpin (HOGS). Based on the filing, it appears as though their position remains unchanged with 3,000,000 shares. This total represents an 8.5% ownership stake in HOGS. We covered when TPG-Axon was buying HOGS back in September. Per Google Finance, Zhongpin is "principally engaged in the meat and food processing and distribution business in the People’s Republic of China (the PRC)."

Singh founded TPG-Axon in 2004 in collaboration with private equity firm Texas Pacific Group. Prior to launching his hedge fund, Singh was co-head of Goldman Sachs' principal strategies group.

International Paper is "a global paper and packaging company. It is complemented by the North American merchant distribution system, with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. The Company operates in six business segments: Industrial Packaging, Printing Papers, Consumer Packaging, Distribution, Forest Products, and Specialty Businesses and Other."

For all other SEC filings, head to our ongoing hedge fund tracking series.