10/17/13

With the stock market tracking back toward record highs, Apple back above $500 and Facebook working on a double for the year, finding value can be more challenging than finding the latest hot stock.

As I’ve shared in recent weeks, at billionairesportfolio.com we constantly scour the universe of stocks, through our many proprietary screens, to uncover undervalued stocks that have the potential to produce multiples on our investment. And despite the run-up in broader stocks, we continue to find great opportunities.

One of our favorite “deep value screens” not only identifies cheap stocks, but also situations where a rich, influential investor has taken a significant stake. As a shareholder, the presence of this type of investor can mean you have a partner on your side, working everyday to push management to unlock value in the company.

Selecting deep value stocks, with the presence of an influential investor that is hell-bent on unlocking value, is a very powerful formula. It’s especially powerful when we find situations where the big investor is down 10% or more on their investment. That tends to raise their sense of urgency and their aggressiveness with management. And that tends to result in bigger winners.

With all of that being said, here are five stocks that some top hedge funds and billionaire investors are down on, by 10% or more:

1) Transocean (RIG) – Billionaire Carl Icahn owns almost 6% of this oil and gas exploration company. Icahn’s average cost is $49. The stock currently sells for $45. This means you are getting a 10% discount to what Icahn paid for this stock. To even sweeten the deal RIG currently pays a 5% dividend.

2) J. C. Penney Company, Inc. (JCP) – Four different hedge funds own this stock, and all four paid a much higher price than where JCP currently trades. Glenview Capital, Perry Capital, Tiger Consumer and Soros Fund Management together own more than 15% of this stock. The average price that these hedge funds paid for JC Penney is more than $13 a share. If you bought JC Penney today you are getting a 41% discount to what these top hedge funds paid for their shares. Moreover, JC Penney is selling at distressed valuation levels. It has a price-to-sales of 0.13 and price-to-book of 0.68.

3) Dynavax Technologies Corporation (DVAX) – Two top hedge funds that own more than 8% of this biotech stock. The two funds, Orbimed Advisors and RA Capital Management, are both biotech focused hedge funds run by MDs and PhDs. They paid an average cost of $3.10 for Dynavax. That means if you buy Dynavax today you are buying it at 61% discount to what these top biotech hedge funds paid for their shares.

4) RadioShack Corp (RSH) – Three top hedge funds own Radioshack at much higher prices that what the stock is selling for today. Highfields Capital Management, top private equity firm Blackstone Group and Donald Smith & Company Inc. own more than 15% of RadioShack. The average cost these three hedge funds paid for RadioShack is $4.25. That is more than 20% above what RadioShack is selling for today. If you piggyback these top funds into Radioshack today you are paying a 20% discount to what these top investors paid for this stock.

Will Meade
President of The Billionaires Portfolio
Providing Sophisticated Hedge Fund Strategies and Analysis For The Everyday Investor