BALTIMORE (Stockpickr) -- Fund managers get to turn over a new leaf today, and they couldn't be happier.
With the dust settled from 2013's trading, the S&P 500 Index churned out gains of 31.8% for the year, spectacular performance by pretty much any measure. And so while it was a great year for investors in general, it was a challenging year for professional investors whose funds had to try to keep up with the broad market.
But all the performance counting starts anew as of 9:30 this morning, with the opening bell for the first trading session of 2014. So how are the hedge funds positioning themselves for the New Year? And should you follow suit with your own January trading?
Today, we'll take a closer look by peeking into the names that hedge fund managers love most right now.
To do that, we're focusing on 13F filings. Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F.
In total, approximately 3,400 firms file 13F forms each quarter, and by comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around. While the data is generally delayed by about a quarter, thats not necessarily a bad thing research shows that applying a lag to institutional holdings can generate positive alpha in some cases. Thats all the more reason to crack open the moves being made with pro investors' $17.6 trillion under management.
Today, well focus on hedge funds' 5 favorite stocks from the last quarter.
The last few months have brought an about-face for Facebook (FB), converting the social network from an IPO laughingstock to a name that's left patient shareholders laughing all the way to the bank. Since shares bottomed back in late July, Facebook has rallied more than 111%.
Hedge funds have taken notice too, adding 234 million shares of the stock to their portfolios last quarter. That's enough to make FB the biggest conviction bet among pro investors as we enter 2014.
Facebook's social portal is the most popular Web site on the Internet. Users spend more time on FB's pages than any other site. It also holds some of the most valuable demographic information on its users, a fact that dramatically increases the firm's ability to sell ultra-targeted ads at premium pricing. Mobile ads have been the Achilles heel at FB for the last few quarters, but they've recently been heating up as FB better monetizes the huge (and growing) swaths of users who log in from phones or tablets.
FB's business isn't perfect. Facebook earns money by distracting its users from connecting with their friends and clicking ads instead. That's unlike Internet ad incumbent Google (GOOG), for instance, which generates ad revenue by connecting users with the items they're actually searching for. That disconnect is going to need to be bridged if Facebook is to generate Google-sized sales from its traffic.
From a trading standpoint, FB is looking a little "toppy" at the moment. I'd recommend steering clear of it until it can resolve its fundamental or technical issues.
Oil service giant Schlumberger (SLB) may seem like a surprising choice for one of hedge funds' favorite stocks right now. After all, the staid energy play isn't exactly a hot momentum stock, and the rest of the oil space has been lagging the S&P for the last year. But attractive positioning and a healthy cost structure give SLB some big advantages over the rest of the sector.
That's a big reason why funds picked up 10.66 million shares of the firm in the most recent quarter.
Schlumberger's revenues come from a menu of niche services such as seismic surveys and well drilling and positioning. In a nutshell, SLBs job is to pull oil out of the ground as efficiently as possible. Oil firms turn to Schlumberger because the tasks they need to accomplish are too nuanced or proprietary to pull off in-house. The firm has long been one of the biggest R&D investors in the oil service space, and that face should keep SLB's presence at oil fields a constant as its capabilities improve.
Oil prices sitting on the high end of their historic range have had no small part in SLB's success in the past few years. Higher prices mean that more oil projects are economically viable than before, and that means that SLB has more work. Exposure to exciting international markets (like its leading position in Russia, for example) provide the best growth driver for the years ahead. While SLB isn't exactly cheap at current prices, the richer valuation is proving justified for 2014.
Institutional investors have been fans of Celgene (CELG) for a while now -- and it's proven to be a good bet. Shares of CELG have rallied more than 117% in the last 12 months, beating the S&P's impressive performance 3.8 times over during that period. In the most recent quarter, hedge funds picked up 4.32 million shares of the $70 billion biopharmaceutical firm, good enough to make it the third most-loved name on their buy list.
Celgene is a pharmaceutical firm that focuses on treatments for cancer and immunological disorders. The firm has had some notable successes with drug approvals in recent years, with marketable names that include Revlimid, Thalomid and Vidaza in addition to an attractive pipeline of upcoming drug candidates.
Not all of Celgene's prospects are "new," though. As the firm's researchers come up with new indications for existing therapies, the firm should be able to generate material increases in sales. The addition of Abraxis BioScience and Pharmion to the firm's operations have added approved drugs to the firm's pipeline in recent years at bargain prices.
Unlike most other large pharmaceutical names, CELG doesn't pay out a dividend. Instead, it's been using its ample cash flows to finance growth. As a result, Celgene sports a strong balance sheet with $1.25 billion in net cash. That lack of balance sheet leverage is especially attractive considering the acquisitions that the firm has embarked upon in recent years.
Momentum still looks strong in Celgene heading into 2014. Investors could do worse than to follow hedge funds into shares.
Drones or no drones, you can't argue against Amazon.com's (AMZN) dominance in the e-tailing business. That success has helped propel the firm more than 62% in the trailing 12 months, doubling the S&P's rally over the same period.
Hedge funds have taken notice too, adding 5.75 million shares to their portfolios for the quarter.
Amazon is one of the most conspicuous survivors of the dot-com bubble -- and one of the few names that's managed to maintain its "castle in the clouds" valuation through bubbles and busts. Investors shouldn't be too excited about that fact, however; the high price tag on shares today relative to fundamental performance makes downside risk a real concern the next time Amazon disappoints on numbers. Value investors would find some comfort if bigger earnings filled that gap.
That could happen thanks to AMZN's newer businesses -- AMZN's entrance into digital products is one of the firm's most exciting opportunities. By selling Kindle tablets at or below cost, the firm is driving significant digital content consumption (its biggest margin products). The firm's distribution network also accounts for a disproportionate share of Amazon's valuation because it's extremely difficult (and costly) to replicate, and the balance sheet is slightly net cash positive.
As long as momentum remains intact in Amazon, it's worth holding on to, but keep your stops tight in this name.
Industrial conglomerate United Technologies (UTX) has its hands in a wide array businesses that range from construction to aviation to security products. The companys brands include well-known names like Carrier air conditioners to Sikorsky helicopters. That exposure means that despite the diversification, UTX is nothing if not cyclical.
But cyclical doesn't have to be a bad thing. For every ebb there's a flow, after all. And with the economy squarely in expansionary mode right now, the big-ticket items that UTX sells are seeing some tailwinds from the historically-low cost of capital today. One of the most consistent revenue generators for UTX has been parts and service. Because the elevators and jet engines that UTX makes are capital-intense items, keeping them serviced properly is a good investment for the firms customers (or more often a legal mandate) -- and it means that UTX can lay claim to consistent, sticky revenues for its troubles.
Like most industrial names, UTX carries some leverage on its balance sheet. But the $21 billion debt load is offset by more than $7.3 billion in cash and investments, keeping levels very reasonable. Hedge funds added 2.22 million shares of United Technologies to their portfolios in the most recent quarter. Investors looking for industrial exposure in 2014 should give this name a closer look.
To see these stocks in action, check out the Q4 2013 Institutional Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.