Over the past year, the hedge fund I run beat the U.S. stock market by five percentage points. Alas, the news isn’t as good about my four picks in the January 2012 issue. They returned 6.2%, on average, eight points worse than Standard & Poor’s 500-stock index. I apologize for lousy selectivity.
In a desperate attempt to avoid a similar fate in 2013, I am picking seven stocks this time -- two to sell short (a bet on falling share prices) and five to buy. Let’s begin with the shorts (share prices are as of November 2).
Even though Salesforce.com (symbol CRM, $147) has a market value of $20 billion, the cloud-computing giant barely makes any money, and it sometimes resorts to accounting gimmicks to show a profit. The stock trades at a steep 74 times estimated earnings for the fiscal year that ends in January 2014. Insiders, as well as executives at companies acquired by Salesforce with its shares, have been selling like crazy. The stock could easily be cut in half.
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The food is fine at Chipotle Mexican Grill (CMG, $262), but growth of same-store sales (sales at stores open at least one year) is slowing. That’s terrible news for a stock that trades at a high 25 times estimated 2013 earnings. Other negatives: Rival Taco Bell’s revamped menu is doing well, food costs are set to rise sharply, and many consumers are looking for healthier alternatives.
My buy suggestions. Let’s start with Ocwen Financial (OCN, $35). The stock soared 142% in 2012, but it still has room to grow. Ocwen services mortgages, so it’s partly a play on a resurgent housing market. In October, the company announced two deals -- one for the loan-servicing business of Residential Capital and the other for Homeward Residential, a mortgage servicer and originator. Analysts see Ocwen earning $4.49 per share in 2013, but I think profits will be much higher.
Fortress Investment Group (FIG, $4.55) is a New York City firm that manages hedge funds, private-equity funds and other accounts. Its stock traded as high as $34 in 2007, before plunging toward the abyss. Fortress’s funds have been performing well, and the firm is raking in billions of dollars in new money. In addition, because many formerly laggard funds have rebounded, Fortress is in a position to start collecting more in performance-incentive fees. If you subtract the cash and investments on Fortress’s balance sheet from its market value, the stock trades at just 3.5 times estimated 2013 profits.
A developer and homebuilder in the U.S. and Canada, Brookfield Residential Properties (BRP, $18) is well positioned: More than 80% of its Canadian assets are in oil-sands-rich Alberta. The Calgary company has owned most of its land for years but carries the value of that property on its books at cost. If the shares traded in line with Brookfield’s peers, they would triple.
With growth in China and other emerging markets slowing, buying shares in Joy Global (JOY, $64), one of the world’s biggest coal-mining-equipment companies, might seem crazy. But the stock, down 31% from its January 2012 high, more than reflects the slowdown. Joy’s stable maintenance and service business -- 60% of revenues -- is worth about $50 a share. If the global economy were just slightly stronger, its new-equipment business would be worth about the same. Despite growing use of natural gas in the U.S., worldwide construction of new coal plants remains strong. Joy Global shares could easily see $100 again in the coming year.
When American International Group (AIG, $33) announced strong third-quarter results, CEO Robert Benmosche said the insurer might not buy back any more AIG shares held by the U.S., as it had earlier said it might. The stock sank on the news, but investors missed the bigger picture. AIG trades at about 50% of its book value of $70 per share, while its peers typically trade at about book value. AIG could eventually earn $6 per share and trade at, or close to, its rising book value.
Columnist Andrew Feinberg manages a New York City–based hedge fund called CJA Partners.
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