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 The Little Book That Beats the Market and because his system of seeking out companies with high returns on capital and hefty earnings yields. His "Magic Formula" 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 $2.3 billion in value as of June 30, 2013.
So what does Gotham's latest quarterly 13F filing tell us? Here are a few interesting details:
The biggest new holdings are Salix Pharmaceuticals and Werner Enterprises. Other new holdings of interest include Pinnacle Foods (NYSE:PF), a recent IPO with a strategy of "Reinvigorating Iconic Brands" and a new dividend, yielding about 2.6%. The company has a significant debt load, but it also has a strong brandlineup, featuring brands such as Birds Eye, Aunt Jemima, Hungry-Man, Van de Kamp's, Armour, Lender's, Mrs. Paul's, Vlasic, Log Cabin, Mrs. Butterworth, and Duncan Hines. It just bought Wish-Bone salad dressing for $580 million, too. In Pinnacle's second quarter, revenue dropped 3%, with management noting, "We delivered another quarter of strong earnings growth as we expanded gross margins through effective productivity programs and ongoing improvement in product mix."
Among holdings in which Gotham Asset Management increased its stake was Edwards Lifesciences (NYSE:EW), a heart-valve maker. The stock got a boost recently when Japan announced that it would reimburse patients for Edwards's SAPIEN XT valves. The company's second quarter featured results that exceeded expectations on solid sales of its Sapien valve. Revenue rose 7%, while EPS surged 44%. It does face competition, though, such as from Medtronic, which is more than six times its size. Bulls like Edwards' devices permit the avoidance of more invasive procedures or open-heart surgeries.
Gotham Asset Management decreased its stake in Permian Basin Royalty Trust (NYSE:PBT), which has seen its top and bottom lines shrink a bit in recent years. The stock yields 7.9%, though, is paid monthly, and has risen in recent years. Its fortunes are tied to energy-producing properties in Texas, and to the prices of oil and gas.
Finally, Gotham's biggest closed positions included MetroPCS Communications and Sauer-Danfoss. Other closed positions of interest include GT Advanced Technologies (NASDAQOTH:GTATQ) and McDermott International (NYSE:MDR). GTAT Advanced Technologies, in the solar energy business, has been the Nasdaq's most hated stock, heavily shorted due to struggling Chinese solar companies and pricing pressures. Shorts have been burned, though, with GTAT delivering surprisingly strong second-quarter results and boasting some promising technologies such as sapphire-based materials that could serve as screens in smartphones and elsewhere.
Oil and gas equipment and services company McDermott International took a big hit after it posted very weak second-quarter results, and its stock received several analyst downgrades. As the CEO noted, "As a management team, we are taking immediate and decisive actions to correct the weakness we have experienced in our project bidding and execution..." He added, "We are driving a more disciplined culture within the Company," and warned that, "problematic projects are expected to require some time to fully work through the system." Still, the company does have an order backlog of $5.1 billion and with a forward P/E of 12, some see value there.
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. 13-F forms can be great places to find intriguing candidates for our portfolios.