Finding investment ideas is never an easy task. Hedge funds, with their manpower and access to research, outgun individual investors. Some of the greatest minds in the market also run many of these hedge funds.
As far as stocks that the billionaires are buying, it is always a positive sign if more than one major hedge fund is buying the stock. Below are three stocks that saw some of the greatest interest among top hedge funds.
First up is emerging e-commerce giant eBay (Nasdaq: EBAY), which had seven hedge funds added to their portfolios. The most notable buyers included Icahn, activist fund Jana Partners and Tiger Consumer Management.
Icahn tried to convince eBay to spin off PayPal. (My colleague Tim Begany took at look at this story last month.) After a bit of back-and-forth, eBay finally convinced Icahn that spinning all of PayPal off was not a positive for eBay investors. However, Icahn still believes the PayPal business (which generates just over 40% of eBay's total revenue) is undervalued. Icahn wants to see PayPal operating with an independent management team. His latest idea is for eBay to sell 20% of PayPal in an IPO.
Regardless, shares of eBay look compelling from a valuation perspective: EBAY trades at a price-to-earnings (P/E) ratio of under 15 based on next year's earnings estimates. Over the past five years, eBay has traded at an average P/E ratio of 20.
Verizon (NYSE: VZ) is another stock that top hedge funds were buying earlier this year. Seven funds added Verizon to their portfolios during the first quarter. Buffett's Berkshire Hathaway (NYSE: BRK-B) is the most notable buyer of Verizon. Also adding Verizon to their funds were John Paulson of Paulson & Co. and Loeb's Third Point.
Verizon offers a juicy 4.3% dividend yield, but that is likely not the only reason that hedge funds are buying up the stock.
The telecom industry is heating up and these investors might be looking to push Verizon to make a deal, whether it be a merger or acquisition. AT&T (NYSE: T) has plans to snatch up DirecTV (Nasdaq: DTV), combining the U.S.' second-largest wireless and pay-TV companies (my colleague David Sterman recently evaluated what a deal might mean for investors in T). Meanwhile, Sprint and T-Mobile, the #3 and #4 players in the wireless industry, are hoping to merge in an effort to help compete with Verizon and AT&T. One potential partnership for Verizon could be with Dish Network (Nasdaq: DISH), the largest pay-TV provider, which also has one of the largest portfolios of wireless spectrum.
Then, of course, there is the fact that Verizon now owns 100% of Verizon Wireless. During the first quarter, the telecom company bought the 45% stake of Verizon Wireless that it did not already own from Vodafone for $130 billion. This gives Verizon more operational flexibility and control over its faster-growing, more profitable segment, putting its destiny in its own hands.
Five hedge funds bought Hertz (NYSE: HTZ) during the quarter. Hertz has been a hedge fund favorite for some time, but Jana Partners, Glenview Capital and Luxor Capital joined Loeb's Third Point as major owners.
Since we profiled Hertz back in February, shares are up over 13%, but HTZ still appears to be a good value. It is still the world's leading car rental company by market share, and with the consolidation in the industry over the past few years, Hertz should be able to benefit from pricing power. However, the recent interest by hedge funds could be because Hertz is becoming a pure car rental company by spinning off its equipment business.
The company plans to spin off its equipment rental business in early 2015. Hertz will receive up to $2.5 billion from the spin-off. It will use a portion of that to complete its $1 billion share repurchase program. That buyback plan alone could reduce its shares outstanding by nearly 8%. The spin-off should also help boost the company's cash flow, considering Hertz would no longer have to make large fleet investments for its capital-intensive equipment rental business.
Being able to focus on just the car rental business could also help boost earnings. This kind of earnings growth potential, coupled with its relatively cheap valuation, makes Hertz a compelling growth at a reasonable price (GARP) stock. Shares trade at a P/E-to-growth (PEG) ratio of only 0.9.
Risks to Consider: Form 13Fs filings are delayed by up to 45 days after the end of the quarter, so the hedge funds that bought the stocks during the first quarter could have already sold off their position by the time of the filing.
Action to Take --> Using 13F filings is a great way to find new ideas. These three stocks were added to a number of new hedge fund portfolios during the first quarter. They also have positive aspects that make them enticing for a long-term investor.