Every quarter, many money managers have to disclose what they've bought and sold via 13F filings. Their latest moves can shine a bright light on smart stock picks.
Today, let's look at Joel Greenblatt's Gotham Asset Management. It's of great interest to many investors because Greenblatt is the author of the well-regarded and best-selling book The Little Book That Beats the Market and because his "magic formula" investing strategy, which seeks out companies with high returns on capital and hefty earnings yields, has many fans. As my colleague Morgan Housel has noted: "The simple formula absolutely destroys market averages over time. Greenblatt backs this up with considerable statistical evidence."
The company's reportable stock portfolio totaled $3.1 billion in value as of Sept. 30, 2013.
So what does Gotham's latest quarterly 13F filing tell us? Here are a few interesting details.
The biggest new holdings are engineering and construction specialist URS and chicken supplier Pilgrim's Pride. Other new holdings of interest include Cree (NASDAQ: CREE ) and PotashCorp (NYSE: POT ) . LED lighting specialist Cree saw its stock slump following a quarterly earnings report that featured big double-digit revenue and earnings growth along with reduced near-term projections from management. Some expect the LED market to grow by about 34% annually over the next few years, eventually totaling nearly $100 billion, and Cree is investing heavily in it. Meanwhile, Cree's bulbs have received an Energy Star rating that will make them eligible for rebates from utility companies. A possible ban of some traditional light bulbs could also boost the market for LED lighting. The stock isn't cheap, but it seems promising over the long run.
Fertilizer giant PotashCorp offers a tempting 4.5% dividend yield and its payout has increased by nearly 1,000% over the past three years! The company has struggled in recent years, dealing with an oversupply in the market and the breakup of a key Russian cartel. Potash's last quarter featured revenue down 29% and earnings down 45%, and the company recently announced it will cut more than 1,000 jobs. Some worry about falling profits, but there will be a long-term demand for fertilizer, and PotashCorp compares favorably with key rivals, enjoying a low cost structure.
Among holdings in which Gotham Asset Management increased its stake was Questcor Pharmaceuticals (UNKNOWN: QCOR.DL ) . Questcor stock has doubled over the past year and yields 2%. (Its dividend was hiked by 25% earlier this year.) Questcor is largely known for its multiple sclerosis (MS) drug, Acthar. It's being evaluated for many more indications, such as in pulmonology, but Questcor is also facing questions about its marketing practices for the drug. Questcor has fat profit margins and substantial and growing free cash flow, and with a single-digit forward P/E ratio it's attractively priced -- especially given its solid growth rate. Still, it's not unreasonable to favor companies not under investigation.
Gotham Asset Management reduced its stake in lots of companies, including New York Community Bancorp (NYSE: NYCB ) and Frontier Communications (NASDAQ: FTR ) . New York Community Bancorp, known for sound management, has grown by an annual average of 28% since its IPO in 1993, far outstripping rivals. It has been buying other banks and expanding its commercial and industrial lending business. The bank's third quarter featured estimate-topping earnings (albeit lower than those a year ago) and improving credit quality. New York Community Bancorp stock sports a whopping 6.1% dividend yield and has attracted many with its smart credit management and shareholder-friendly ways, but some worry that its dividend might get reduced if the bank grows larger, as via more acquisitions.
Frontier Communications is saddled with considerable debt but is still yielding a whopping 8.5%. Its stock has been heavily shorted, with bears worrying about its debt and the sustainability of the dividend. Most of its debt isn't due soon, though, so it's focusing on investing in growth and is aiming to maintain its dividend (which has shrunk in recent years) via solid free cash flow. The company is shifting its focus from landline operations toward higher-margin businesses such as broadband and serving business customers. At a Goldman Sachs conference, Frontier's CEO noted a trajectory of improving revenue, with growing data revenue making up for lost voice revenue.
Finally, Gotham's biggest closed positions included Salix Pharmaceuticals and Universal Corp.
We should never blindly copy any investor's moves, no matter how talented the investor. But it can be useful to keep an eye on what smart folks are doing, and 13F forms can be great places to find intriguing candidates for our portfolios.
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