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Hedge Funds' Best Picks Show the Way for 2012

Materials

Some of the biggest hedge fund managers were down on the materials sector during the third quarter, although one specific stock in the sector was a buy for a few fund managers, which increased their exposure to the group.

The materials sector has been the second worst of all S&P 500 sectors this year, falling about 10% through Nov. 10, according to Capital IQ. Only financials have performed worse this year as a group. Interestingly, the materials group saw the second largest increase in earnings growth during the third quarter, with profits up 35% from the prior year. Looking ahead, though, earnings are expected to grow just 12% in 2012, down from an estimate of 34% this year, according to FactSet Research.

With slowing growth on the horizon, hedge funds were jumping out of some positions in materials stock, reducing their reported portfolio's overall exposure to the sector. LyondellBasell (LYB) and Mosaic (MOS) were among the names dropped. Both stocks were sold by Third Point and Highbridge Capital. Jana Partners sold shares of Lyondell, while Viking Global sold Mosaic.

Meanwhile, Brevan Howard saw a big decline in exposure to materials stocks after the hedge fund dumped Barrick Gold (ABX) and Newmont Mining (NEM), two stocks that were sharply higher during the third quarter.

On the other hand, hedge funds like Centaurus, Farallon Capital, and Paulson & Co. all saw their portfolios increase their stakes in the materials sector. The common thread between all three is Nalco Holding (NLC), a water treatment and chemicals company. However, these hedge funds likely picked up shares of the company after Ecolabs (ECL) announced in July it would buy Nalco.

John Paulson, who has seen his funds collapse this year, bought other materials companies as he increased his positions in gold-related companies like Barrick Gold, Iamgold (IAM), Rangold Resources (GOLD) and Agnico-Eagle Mines (AEM). This came as Paulson slashed his huge position in the SPDR Gold Trust (GLD).

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