These Five Stocks Are Hedge-Fund Favorites

Many of this country’s most talented stock pickers choose to work at hedge funds, where salaries and bonuses are often more attractive than at bank trust departments or mutual funds.

Gurufocus.com publishes a screen of stocks that are popular with leading hedge funds. For this column, I took that screen and added two modifications.

First, to pass my modified screen, a stock had to be cheap, selling for less than 15 times earnings.

Second, the company had to show earnings growth of at least 5% a year for the past ten years, five years, three years and one year – in other words, some consistency to growth.

Five stocks that made it through this gauntlet look particularly appealing to me.

Toyota

Toyota Motor Corp. (TM) sold 11.2 million vehicles last year, making the Japanese company the world’s largest car maker for four years in a row. The runner-up, Volkswagen Group, sold 9.2 million vehicles.

Toyota’s American Depositary Receipts (ADRs) sell for about seven times earnings. That’s cheap compared to most stocks, but about par for the course for an automaker.

Over the past ten years, Toyota has increased its earnings by an average of more than 7% per year. Its return on stockholders equity lately has been 15%, compared to a ten-year average of about 11%.

D.R. Horton

Homebuilders have one big tailwind and one big headwind at the moment. The tailwind is that there’s pent-up demand for houses. The headwind is that mortgage rates are onerous.

Now that the Federal Reserve has switched from raising interest rates to cutting them, I hope that mortgage rates will come down a peg or two. That should help the homebuilders, who are already making pretty good money.

D.R. Horton is the largest U.S. homebuilder by sales, and builds homes at a variety of price points. Over the past ten years, it has increased its revenue by 18% a year, and profits even faster. The stock seems reasonably priced to me at 12 times earnings.

Loews

Loews Corp. is a conglomerate controlled by the Tisch family. Jonathan Tish is chairman, and James Tisch (his cousin) is president and chief executive officer. Insiders, including the Tisches, own 25% of the stock; the public owns the rest.

The Tisches like to buy and sell major assets. In the past, Loews owned a big stake in CBS television, all of Lorillard Tobacco Co., Bulova Watch Co., and the Loews movie theatre chain.

Nowadays, Loews has four major parts: CNA Financial Corp. (a property & casualty insurer that is 92% owned), Diamond Offshore Drilling Inc., Boardwalk Pipeline Partners LP, and Loews hotels.

Wall Street analysts don’t much care for Loews stock. But I think there’s real value in this collection of assets.

H&E Equipment

Do you need a crane? Some earthmoving equipment? A lift truck? These are the sorts of things you can rent or buy from H&E Equipment Services Inc. (HEES), based in Baton Rouge, Louisiana.

The stock began trading publicly in 2006, and has about 2,300 employees. It has posted a profit in 11 of the past 12 years. The only exception was the pandemic year of 2020.

H&E’s return on stockholders’ equity lately has been about 31%. On that measure of profitability, I consider anything north of 15% to be good. H&E has exceeded that mark in (again) 11 of the past 12 years.

Only five Wall Street analysts follow the company. Four of them rate it a “buy.” The stock sells for about 13 times earnings.

Customers Bancorp

Customers Bancorp (CUBI), based in Reading, Pennsylvania, is parent of Customers Bank, which has branches in Pennsylvania, Illinois, Massachusetts, New Jersey, New York and Washington D.C.

Jay Sidhu, the bank’s chairman, wrote a book titled “Never Ever, Ever Give Up.” His Son, Sid Sidhu, is the bank’s chief executive officer.

Return on assets is my go-to measure for banks. I like to see it above 1.00%. Customers Bancorp has done that for the past three years in a row.

In August, the Federal Reserve charged the bank with deficiencies in its anti-money-laundering and risk-management procedures. That helped to knock the stock down from a high near $66 in June to a recent price of about $44. The stock is now quite cheap, at six times earnings.

I normally report the results of past recommendations, but this is the first time I’ve written about stocks that are hedge-fund favorites. I’ll detail the results of today’s recommendations in a future column.

Disclosure: I own D.R. Horton shares for one client.