BALTIMORE (Stockpickr) -- Mr. Market is in recovery mode this fall as the stocks that struggled at the beginning of the season start building more buying pressure behind them. This is creating a very attractive environment for consumer discretionary stocks -- and hedge funds are buying them with both hands.
It's not just the bounce trade that's making consumer stocks look so attractive here. We're also smack-dab in the middle of earnings season, and the consumer discretionary sector has been on fire fundamentally. As of this writing, a full 80% of consumer discretionary stocks in the S&P 500 have beaten Wall Street's estimates for the third quarter.
And some of funds' favorite consumer stocks have yet to report their numbers. Now the question is whether it makes sense to follow the "smart money" into their favorite consumer discretionary stocks this month.
Today, we'll answer that question by peeking at the latest round of 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 3,800 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, that's not necessarily a bad thing – research shows that applying a lag to institutional holdings can generate positive alpha in some cases. That's all the more reason to crack open the moves being made with pro investors' $20.5 trillion under management.
And since it's still very early in 13F season, we're able to use a small sampling of early filers to get a sneak peek at what funds are doing before the rest of the forms hit the SEC's servers.
Today, we'll focus on hedge funds' 5 favorite consumer stocks.
Twenty-First Century Fox
Up first is media conglomerate Twenty-First Century Fox (FOXA) , which owns a diverse away of media assets, ranging from its eponymous film studio to TV networks and satellite broadcasters. The decision to spin out News Corp.'s (NWSA) publishing businesses and separate them from the firm's media assets leaves FOXA with fatter margins and attractive growth prospects at the exact same time that conventional print media is having to rethink its business strategy.
Meanwhile, the video content business is booming. Cable companies and streaming video services such as Netflix (NFLX) and Amazon (AMZN) Prime Video are cutting big checks for access to studios' TV and movie libraries, and that creates a big new monetization channel for the firm's assets. Here in the U.S., Fox owns a deep economic moat thanks to cash-cow television deals with large sports leagues, such as the NFL. And internationally, it's the Asian and Latin American businesses that look to provide the most meaningful growth potential in the years ahead.
As TV penetration increases outside of the U.S., Fox is the best-positioned of the U.S. broadcast networks to benefit. Here at home, Fox's sports and news content draws big advertising dollars, while less real-time programming is just beginning to draw big licensing dollars.
It's not surprising that hedge funds are big fans of Fox's business here. Funds added 7.26 million shares of the firm to their portfolio in the most recent quarter. That's a 21% boost to funds' overall stakes in Twenty-First Century Fox, bringing their collective bets to $1.4 billion.
FOXA is a great way to play the TV content boom in 2015.
Fox isn't the only big TV network bet that hedge funds are making right now. They're also buying up shares of Discovery Communications (DISCK) . Last quarter, funds added 5.49 million shares of the pay TV giant to their portfolios, bringing their total bets on Discovery up to $700 million.
Discovery is the No. 1 pay TV network, with channels including the namesake Discovery Channel, TLC, Animal Planet and Velocity. Discovery also owns a 50% stake in the Oprah Winfrey Network and The Hub, a children's network joint venture with Hasbro (HAS) . Discovery's ownership of niche TV channels makes it an attractive target for advertising dollars; a car parts supplier is more willing to spend higher rates for a targeted spot on the automotive-focused Velocity channel, for instance, and that helps to offset the smaller audience there.
Like Fox, Discovery is focused on international growth. The firm currently sends foreign language feeds of its channels to more than 40 different markets, with over 130 individual feeds in all. Even though Discovery doesn't command affiliate fees on the scale of, say, ESPN, providing a large chunk of a cable provider's lineup does give it a big bargaining chip with cable companies. The same TV penetration growth in emerging markets that stands to benefit FOX also stands to benefit Discovery in the years ahead.
Discovery trades for an earnings multiple of just 11. That bargain price tag and niche pay TV focus makes it even more attractive than Fox, in my view.
Athletic apparel giant Nike (NKE) might just be the earnings story of the year. The firm shocked investors with its fiscal 2015 first-quarter earnings numbers at the end of September, rallying double digits on surprise earnings growth -- and hedge funds have been piling into shares as a result. Last quarter, funds added 961,890 shares of Nike to their existing positions, a $214 million increase at current price levels.
So does it still make sense to buy Nike here?
Nike is the world's biggest footwear and sports apparel brand. The firm's products are carried at more than 50,000 retail stores, 750 Nike company stores and a huge Web presence. Besides Nike's namesake "swoosh" brand, the firm also owns lifestyle brands Converse and Hurley. Today, approximately 40% of the firm's sales come from the saturated North American market -- but Nike is betting big on hopes of international growth, and investors are too. As middle class populations continue to expand in emerging markets, so too should entry-level status symbols like Nike shoes and apparel.
The same size considerations that limit growth in Nike's core North American market also gives the firm some big leverage over retail partners. It's not uncommon for Nike products to contribute nearly half of all sales at a footwear store, so Nike enjoys pricing power (and product merchandising) that few other manufacturers are able to get.
Make no mistake: Nike isn't cheap here. But the firm's recent successes and technical trajectory should put triple-digit prices within reach. I like Nike a whole lot more short-term than long-term right now.
2014 has been a blockbuster year at Indian car company Tata Motors (TTM) . Since the calendar flipped to January, shares of this $25 billion automaker have rallied more than 48%. It's not hard to see why, either. In the last quarter, TTM saw its sales grow 38% over the prior year. That's a growth pace that would be unheard of at a mega-cap U.S. legacy automaker.
Tata got its start in India, manufacturing a wide array of vehicles that range from micro-compact cars to SUVs to commercial trucks and busses. The firm manufactures approximately 17% of the Indian car market, a number that has declined in recent years as Tata's innovation cycle lengthened and its focus turned to its luxury UK car subsidiaries. Looking back, Tata's acquisition of Jaguar and Land Rover (JLR) from Ford (F) in 2008 was probably one of the best bargains of the day – the JLR unit is now profitable, and Tata has an instant inroad into the huge U.S. car market.
Growth in demand for luxury cars, both here in the U.S. and abroad, should help to drive margins higher at JLR, just as increased car ownership in emerging markets drives Tata's non-luxury sales. Today, for instance, India has fewer than 20 cars per 1,000 people, and foreign competitors have serious challenges competing for that market thanks to enormous tax duties imposed on vehicle imports. That means that TTM has a built-in advantage in what's likely to be one of the most important car markets in the year ahead. Likewise, because of the firm's size, it takes relatively small numbers to move the needle at TTM versus an international behemoth like General Motors (GM) or Toyota (TM) .
Last quarter, funds bought up 2.26 million shares of TTM, a $160 million position at current price levels. I think the funds are right on with Tata Motors. This Indian carmaker is likely to be one of the sector's best opportunities in 2015, especially if rates remain lower than expected for longer than expected.
Dollar Tree Stores
Last up on our list of consumers stocks is Dollar Tree Stores (DLTR) , the $12 billion deep discount retailer. Dollar Tree is one of the biggest "dollar store" chains in North America, with some 4,800 stores across the U.S. and 100 in Canada. Approximately 200 of those are the firm's multi price-point Deals chain.
Don't let the word "dollar" fool you. DLTR's prices may be low, but its margins aren't. DLTR converted 7.6% of every sales dollar into profits last year, earning much bigger levels of profitability than most non-discount retail peers. Financially speaking, DLTR's balance sheet is in solid shape, with a $467 million cash position largely offsetting the firm's modest $757 million debt load. That's not a lot of leverage for a firm that earned almost $600 million in profits last year.
Because of the attractive economics of the dollar store model, competition has been fierce lately. To combat that, DLTR made a $9.2 billion bid to purchase smaller chain Family Dollar (FDO) , a deal that was accepted despite a competing takeover bid from rival Dollar General (DG) . The deal could close as early as next month.
Funds have been piling into Dollar Tree ahead of the closing of the FDO acquisition. Last quarter, they added 2.39 million shares of DLTR to their 6 million stake, making it a pretty large conviction buy. Compared with other full-price retail options available to investors today, DLTR comes out as one of the best options for 2015.
To see these stocks in action, check out the Institutional Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.