Some of the Smartest Investors in the World Are Buying These 3 Stocks

It’s fascinating to read through the latest 13-F filings, which reveal the top buys and sells of many fund managers from the prior quarter. While many investors focus on the most high-profile money managers such as Warren Buffett or George Soros, who often tend to find great blue-chip stocks, I’m more interested in lesser-known stocks that the best managers are buying.

Earlier this week, we saw a fresh snapshot as more 13-F filings rolled in, and I’m especially intrigued by three deep-value stocks that some key money managers are loading up on in their portfolios. I may even consider them as candidates for my $100,000 Real Money Portfolio (which you can sign up to receive for free for a limited time.)

Each one of these stocks trades below the shareholder equity found on the balance sheet.

1. Eddie Lampert — iStar Financial (NYSE: SFI).

I wrote about the real estate finance firm in November 2010. Though shares are up 30% since then, they still look quite undervalued.

After the economic crisis of 2008 and 2009, this company’s portfolio of real estate loans was in deep trouble. Large office towers were seeing rising vacancy rates, leaving iStar in a pinch because it lacked the cash flow to cover upcoming bond payments. Fast-forward to 2012 and iStar has managed to raise cash, extend its bond obligations and is no longer on life-support.

Still, the company’s $570 million market value stands at just a fraction of the company’s $1.56 billion in shareholder’s equity. This doesn’t mean the company is worth quite that much. If iStar chose to unload its many loan holdings right now, then it would have to sell them at a considerable loss. But analysts say this stock could work its way up from a current $7 toward the $10-mark as real-estate valuations begin to firm up in a rising economy.

Billionaire Investor Eddie Lampert, best known for his takeover of Sears and K-Mart — now known as Sears Holdings Corp. (Nasdaq: SHLD),  first started building a position in iStar last summer, acquiring 1.9 million shares in the third quarter of 2011. He added another 700,000 in the last quarter and now owns roughly 3% of the company (worth about $14.2 million). That’s too small a position to think about Lampert seeking to take the company private, as he sometimes does, but he appears to have a clear read on the value proposition, with perhaps 40% upside ahead for this stock.

2. David Einhorn — Xerox Corp. (NYSE: XRX)
David Einhorn, who runs Greenlight Capital, likes to invest on the long and the short side. Last fall, I noted the bearish case he was building against Green Mountain Coffee Roasters (Nasdaq: GMCR), and he was subsequently proven right.

Now Einhorn is making a play on the long side, building a new $17 million position in document-management company Xerox. Though the company has only modest growth prospects, he clearly sees the value angle in this investment: Xerox has racked up a cumulative $5 billion in free cash flow in the past three years, and its $11.2 billion market value is at discount to the firm’s $12 billion in shareholder’s equity.

My colleague Adam Fischbaum laid out a solid case for the stock last fall, and I wholeheartedly agree with his take.

Yet Xerox’s shares have yet to gain steam, in part because fourth-quarter results were just “so-so.” But analysts at Brean Murray say “results should strengthen throughout the year,” adding that “the stock feels fundamentally oversold to us.” They’ve got a point. The stock trades for just seven times projected 2012 profits. To support its stock, Xerox plans to buy back roughly $1 billion worth of shares this year. That could shrink the share count by more than 10%.

3. Whitney Tillson — Citigroup (NYSE: C)
I’ve been writing about this financial giant a fair bit in recent weeks, because I have a high level of conviction that a multi-year upward move is setting up for Citigroup as it rises from the ashes of the Great Recession. That’s why it’s a member of my $100,000 Real-Money Portfolio.

So I’m heartened when a banking industry expert like Whitney Tillson agrees with my bullish view. His hedge fund, T2 Partners saw the financial crisis coming and positioned its clients for strong gains on the short side. He subsequently stayed largely on the sidelines, but has become quite active again, and now has an increasingly bullish view. As of June 2011, he owned just 80,000 shares of Citigroup, but he bought 194,000 shares in the third quarter and another 190,000 in the fourth quarter. 

Tillson’s current $12.2 million stake in the Citigroup is a pretty big bet. Only his $19 million investment in Berkshire Hathaway (NYSE: BRK-A) is significantly larger. He’s likely enamored with the fact that Citigroup’s $95 billion market value stands at a steep discount to its $163 billion in shareholder’s equity and $130 billion in tangible book value.

Risks to Consider: These stocks trade below shareholder’s equity for a good reason — each has only partially emerged from a tough stretch and each could take a fresh hit if the U.S. economy slumps anew.

Action to Take –> It often pays to follow in the footsteps of successful fund managers. Eddie Lampert, David Einhorn and Whitney Tillson have all established solid track records, and investors can mimic their performance by loading up on their key holdings. The three stocks I mention here might be a good place to start.

[Note: You can also follow along with my $100,000 Real-Money Portfolio trades free for a limited time. Simply click on this link to sign up.]