At the Motley Fool, we understand that it often pays to zig when Wall Street zags. Still, that doesn't mean we blithely ignore what leading fund managers are buying and selling. And hedge funds, which aren't always in lockstep with the broader market, can be a particularly valuable source of insight.
Every quarter, fund managers managing more than $100 million must disclose their quarter-end holdings publicly by filing SEC Form 13-F. The form lists all U.S.-traded securities held by the manager at the end of the quarter. While the form does not disclose the manager's short positions or the manager's intra-quarter trades, it can shine a bright light onto his or her "long" stock bets. To help us make use of 13-F data, we turned to Motley Fool partner AlphaClone, a research and investment management firm that tracks hedge fund public disclosures, and develops investment strategies based on them.
Q4 2010 update
Gregg J. Powers is chairman and CEO of Private Capital Management (PCM). He has been with PCM for 22 years, rising through the ranks to become president in 1999, CEO in 2008, and chairman in 2009, when founder Bruce Sherman retired. PCM uses a value-based investment style focusing on absolute return. The fund seeks to invest in undervalued companies and looks closely at free cash flow to identify them. The total market value of Private Capital Management's disclosed equity holdings for the quarter ending Dec. 31, 2010, was $1.48 billion across 72 holdings. Here's a chart showing the portfolio's industry allocations:
The fund's 10 largest positions in terms of shares held and associated changes as of Dec. 31 were:
(Nasdaq: CA)-- reduced 8.8%.
(Nasdaq: SYMC)-- reduced 3.7%.
(NYSE: MSI)-- reduced 3.5%.
(NYSE: QTM)-- reduced 23%.
(NYSE: HPQ)-- reduced 7%.
(Nasdaq: MENT)-- reduced 7.2%.
Universal Health Services
(NYSE: UHS)-- reduced 33.7%.
Health Management Associates
(NYSE: HMA)-- reduced 8.6%.
(NYSE: RJF)-- reduced 15.5%.
(Nasdaq: QCOM)-- reduced 8%.
During the quarter, the fund added to its position in Noble Corp. and Consolidated Graphics. On the sell side, the fund reduced positions in many stocks, including all the stocks among the top 10 holdings.
Copying Private Capital Management
Is it worth paying attention to Private Capital Management's moves? According to AlphaClone's backtest simulation, anyone who invested in Private Capital Management's 10 largest holdings at the time they were disclosed publicly each quarter would have returned 70% since 2000, versus 9.1% for the S&P 500 (including dividends) as of March 21. Here's a chart showing AlphaClone's backtest model:
The strategy above mirrors the fund's purchases and sales each quarter, five trading days after the SEC's filing window for Form 13-F closes.
Selected Q4 2010 commentary
PCM's prime focus is on the technology sector, which constitutes 42.5% of the fund's total holdings. Besides technology, the fund has almost equal holdings in services, health care, and financials -- these sectors make up 16.3%, 14.5%, and 13.9%, respectively. Here's where the firm is winning and losing currently and where it's making big new bets:
Quantum was the big winner, with a 75% gain in the fourth quarter of last year. Since then, though, the stock has given back most of those gains. Quantum, which makes up 4.6% of PCM's portfolio, is the leading global specialist in backup, recovery, and archive, with more than 50,000 customers. Quantum is a small-cap stock trading at a high valuation, with a price-to-earnings ratio currently above 200. The stock has a four-star rating (out of five) from Motley Fool CAPS.
Cisco Systems is the largest new addition to the portfolio. Tech giant Cisco, which has had sales of $42 billion and earnings near $7.6 billion in the last 12 months, needs no introduction. The company has been maligned a bit of late, but trades for just 13 times earnings and also has a four-star CAPS rating.
During the quarter, the fund also started new positions in Prestige Brands and Global Cash Access.
So there you have it, the blow by blow of Private Capital management's latest moves and why it can matter to your portfolio. Tell us what you think in the comments below.
Company data provide by AlphaClone LLC, a San Francisco-based research and investment management firm that tracks hedge fund public disclosures. For more information on the firm's investment approach, click here to visit AlphaClone.
IMPORTANT DISCLOSURES FOR BACKTEST PERFORMANCE RESULTS
Backtesting is the process of evaluating a core strategy by applying it to historical data. Backtested performance results are provided for purposes of illustrating historical performance had a core strategy been available during the relevant period. Backtested performance results are hypothetical and have inherent limitations. AlphaClone makes no representation that any core strategy will achieve performance similar to any backtested performance results. Actual results could differ materially from backtested performance and future results could differ materially from backtested performance. Past performance is no indication or guarantee of future results.