Yahoo Finance 3 Hedge-Fund Stocks to Buy and Forget About
Investment ideas are everywhere these days. But one of the best places to search for quality investment ideas is the ownership filings made by hedge funds. These organizations exist for one reason and one reason only: to make a profit buying and selling stocks. And while not all hedge funds generate market-beating returns, many are run by the smartest minds in the business that have generated billions in profits for their investors.
After perusing the regulatory filings of the best performing funds, our Foolish investing contributors identified three stocks that top hedge funds own that investors should consider owning, too: Philip Morris International (NYSE: PM), Howard Hughes Corp. (NYSE: HHC), and Workiva (NYSE: WK). Below are all of the key details on these three stocks and why they are worth buying and forgetting about.
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Embracing change and continuing to reward investors
Sean O'Reilly (Philip Morris International): Hedge Funds control trillions of dollars in assets, and some of the smartest investors in the world manage these private investment companies. And while you shouldn't follow any professional investor blindly, it often pays to listen when one makes a significant investment. Recently, one of the world's most successful hedge funds, Renaissance Technologies, upped its stake in Philip Morris International. The company, which markets top U.S. cigarette brands internationally, actually has no U.S. operations to speak of. The company sells tobacco brands like Marlboro, Philip Morris, Bond Street, Chesterfield, and Parliament, in over 160 countries. Smoking may be on the downtrend here in the United States, but globally, it continues to thrive.
This is not to say that traditional tobacco is a growth industry. Far from it. Philip Morris's cigarette shipment volume for Q3 2017 fell 4.1% to 198.5 billion units. Interestingly, this was by design. The company knows that cigarettes' days are numbered, which is why it has tasked its 400 scientists and engineers to create viable smoke-free products with the stated goal of "Designing a smoke-free future." The plan is working. Heated tobacco shipment volume surged to 198.5 billion in units from 2.1 billion in Q3 2016.
Net revenues in the third quarter were $20.6 billion, up by 3.5% year over year. Diluted earnings per share were $1.27 for the three-month period, up by $0.02 or 1.6%. Not bad for a company that is completely changing its product lineup. Despite the shift away from cigarettes, shares are up over 16% in the last 12 months. The company is making the right moves in creating a smoke-free future. With a dividend yield of 3.8% as icing on the cake, Philip Morris International is a top hedge fund stock to buy and forget about.
A unique real estate play with loads of long-term potential
Matt Frankel (Howard Hughes): One of my largest stock holdings, and one I plan to hold for decades to come, is Howard Hughes Corporation.
Howard Hughes Corporation is a developer of master-planned communities, or MPCs, which are large residential developments that are almost like self-contained cities within cities. They often have amenities such as schools, golf courses, office properties, and entertainment and shopping areas.
For example, the Summerlin community in Las Vegas, Nevada, is one of Howard Hughes' five MPCs, and it has 22,500 acres of land with many of the amenities I mentioned above. The company projects that the residential land in the community won't be entirely sold until 2039, and that the eventual population will exceed 200,000.
The simple explanation of Howard Hughes' business model is that the company starts these MPCs on large plots of unused land and sells residential space to homebuilders, which creates a need for commercial properties. The company then develops commercial properties (like the Downtown Summerlin entertainment district) to generate cash flow.
Even though its MPCs are starting to fill out, major Howard Hughes investor and hedge fund manager Bill Ackman has said that the company has the potential for 37 million square feet of future development in its four core MPCs (this would be a tenfold increase on the company's development so far), with projects such as apartment buildings, hotels, and retail spaces, so it's fair to say that there's lots of room to create value for patient investors.
A trusted solution
Brian Feroldi (Workiva): Pat Dorsey is a fund manager that I greatly admire. Dorsey headed up Morningstar's equity research division for more than a decade, and he is also the author of two must-read books on investing -- The Five Rules for Successful Stock Investing and The Little Book that Builds Wealth. A few years ago, he founded Dorsey Asset Management and now runs a concentrated portfolio.
One stock Dorsey has bet big on is Workiva. Workiva makes cloud-based financial management software that is used to keep important data organized and reportable. For publicly traded companies that have to regularly send financial information to the SEC, staying on top of data management is no trivial task. Since Workiva's "Wdesk" platform is widely viewed as a top-notch solution, the company has already managed to convince the majority of Fortune 100 companies to sign on. In total, Workiva counts more than 2,900 customers on its platform, and its user base is growing like a weed with each passing quarter. What's more, retention rates remain extremely high, which is telling about just how much value its customers derive from the platform.
While Workiva is still small and unprofitable, the company is getting closer to reaching the black on the bottom line. Last quarter, revenue rose 15% while expenses only increased by 8%. That difference helped the company generate positive operating cash flow, so it's only a matter of time before net income follows suit.
Zooming out to the big picture, management estimates that its addressable market opportunity currently exceeds $10 billion. That's a huge number when compared to the $205 million in revenue the company is expected to generate for the full year.
Pat Dorsey is clearly a big believer in the long-term potential of this business. Following his lead sounds like a bright idea to me.
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Brian Feroldi has no position in any of the stocks mentioned. Matthew Frankel owns shares of HCC Insurance Holdings, Inc. Sean O'Reilly has no position in any of the stocks mentioned. The Motley Fool recommends HCC Insurance Holdings, Inc. and Workiva. The Motley Fool has a disclosure policy.
