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6 Stocks Hedge Funds Love in a Recession


  • Today, we take a look at the top three holdings of two funds as of the end of the first quarter. They are Michael Burry’s Scion Asset Management, and Leon Cooperman’s Omega Advisors.
  • Bristol Myers Squibb (BMY): This biopharmaceutical company is cheap at just 8.4x earnings and pays an annual 2.84% dividend yield. Moreover, the company has an accelerated share repurchase program for $5 billion.
  • Booking Holdings (BKNG): This online travel and restaurant reservation system produces a large amount of free cash flow. Last quarter alone, it was 58.8% of the company’s revenue and the company started a massive buyback program. This is Michael Burry’s fund’s second-largest holding.
  • Warner Brothers Discovery (WBD): Recently spun off from AT&T, the Warner Media division was merged with Discovery Inc. Shareholders of AT&T received 71% of the common stock and Discovery shareholders received 29%. In addition, WBD had to pay a huge amount of cash to AT&T, which it funded through taking on debt on its balance sheet in the amount of $47 billion. The stock trades for a forward price-to-earnings ratio of 12 times.
  • Mr. Cooper Group (COOP): The direct-to-consumer mortgage originator and servicer makes most of its revenue from mortgage servicing. This was Cooperman’s largest holding at the end of last year.
  • Alphabet (GOOG, GOOGL): This is Cooperman’s second-largest holding. The search engine company is set to do a 20 for 1 stock split on Jul. 15 and trades for 17x forward earnings.
  • Apollo Global Management (APO): This private equity management firm merged with retirement savings manager and insurance company Athene Holding at the end of 2021. It pays a 3% dividend yield and is cheap at just 7.5x forward earnings.
Stocks hedge funds love - 6 Stocks Hedge Funds Love in a Recession

Source: Panchenko Vladimir/ShutterStock.com

Today, I have chosen six stocks hedge funds love. To simplify this, I decided to pick the top three stocks of two of the most watched hedge funds that are the most popular in the market.

One of those funds is Michael Burry’s Scion Asset Management. We use the company’s 13-F holdings report from the first quarter (Q1) as shown by the Dataroma database, which shows the top three stocks his fund owns on a long-term basis.

The other major fund is the Omega Advisors hedge fund.  This is now mostly a family office for Leon Cooperman and represents his own personal investments. The information for this is also from the company’s 13-F holdings and shows the top three stocks he held as of Mar. 31.

We use the Dataroma database to follow his holdings. As a result, we can figure out how well they still like these stocks each quarter as the information changes.

Moreover, even if these top three holdings have fallen during Q2, which is likely the case, we can get the benefit of their analysis by buying them now. That is because they are cheaper and if these funds liked the stocks at a higher price, they must certainly still like them.

Let’s dive in and look at these stocks:

Ticker Company Price
BMY Bristol-Myers Squibb Company $76.40
BKNG Booking Holdings Inc. $1,804.54
WBD Warner Bros. Discovery, Inc. $14.40
COOP Mr. Cooper Group Inc. $37.81
GOOG Alphabet Inc. $2,260.17
APO Apollo Global Management, Inc. $51.13

Stocks Hedge Funds Love: Bristol-Myers Squibb (BMY)

Bristol-Myers Squib (BMY) logo displayed on a phone screen
Source: IgorGolovniov / Shutterstock.com
  • Market Cap: $163.6 billion

Bristol-Myers Squibb (NYSE:BMY) is a large-cap biopharmaceutical company. It is developing solutions in a number of areas like hematology, oncology, cardiovascular, immunology, fibrotic, neuroscience, and Covid-19 diseases.

This is an inherently recession-resistant stock as analysts are predicting earnings will continue to plow ahead. For example, the average forecast from 21 analysts is for earnings to grow by 1% to $7.58 from $7.51 per share. It is also forecast to rise 6.86% to $8.10 next year. This puts the stock on a multiple of 10x earnings for this year and 9.38x for next year.

Moreover, the company has plenty of earnings to pay out its $2.16 in dividends annually. At $75.96 on Jul. 5, 2022, BMY stock has a dividend yield of 2.84%, which is close to the average for the S&P 500.

On top of this, the company has started an accelerated share repurchase (ASR) program for $5 billion of common stock. BMY said it expects to complete the ASR during Q2 and Q3. That works out to $10 billion annually, or 6.1% of its market value.

So, including the 2.84% dividend yield, the total return for shareholders in BMY stock is almost 10% annually. That is likely a major reason why Michael Burry has this as his fund’s top holding, representing 13.2% of his fund’s value.

Booking Holdings (BKNG)

The home page of the Internet booking of hotels booking.com on the screen the Chinese Xiaomi smartphone in male hand on a computer monitor. BKNG stock.
Source: Andrey Solovev / Shutterstock
  • Market Cap: $71.8 billion

Booking Holdings, Inc. (NASDAQ:BKNG) Earnings are forecast to more than double this year for this online travel and restaurant reservation system to $99.60 per share. But next year, the average forecast of 27 analysts is that it will grow 30.8% next year to $130.31 per share.

That puts this fast growing stock on a forward price-to-earnings (P/E) ratio of 13.7x on 2023 earnings per share (EPS). Moreover, BKNG produces a large amount of free cash flow (FCF). Last quarter, its FCF was $1.586 billion and the company spent $1.049 billion of it on share buybacks. That means FCF represented a huge portion of its revenue for the quarter. It spent 66% of that FCF on buybacks.

So, assuming analysts’ projections of $20.17 billion in revenue pan out next year, it could end up generating $11.76 billion in FCF if the FCF margin holds up. Let’s say that it averages 50%. That would mean that $10.08 billion in FCF would be thrown off by BNKG.

Therefore, if Booking Holdings spends two-thirds of this $10 billion in FCF on buybacks, it could end up buying back $6.67 billion of its stock in one year. That represents 9.3% of its total stock market value. In three years, that works out to 27.9% of its stock. But, of course, that assumes BKNG stock does rise as a result of the buybacks, which is not very likely.

So, you can see why Michael Burry wants this stock as his fund’s second-largest holding.

Stocks Hedge Funds Love: Warner Brothers Discovery (WBD)

The logo of the new Warner Bros Discovery (WBD) company on smartphone screen.
Source: Jimmy Tudeschi / Shutterstock.com
  • Market Cap: $34.6 billion

Warner Brothers Discovery (NASDAQ:WBD) is a spin-off/merger streaming company, which also has a major TV and film studio. Earlier this year, AT&T (NYSE:T) spun off its Time Warner division, which is the home for HBO and the Warner Brothers TV and film studio, to its shareholders. Then, it simultaneously merged that company with Discovery, Inc., which was already public and houses all of the Discovery reality TV channels.

The resulting public company is now owned 71% by AT&T shareholders and 29% by Discovery shareholders. The company will soon produce its first full quarter as a public company. It took on over $47 billion in debt that was paid to AT&T. This could be a significant drag on its earnings. Moreover, the company is not paying a dividend.

So far, WBD stock is down quite a bit. From $24.62 where it closed on Apr. 10, it was at $14.44 on Jul. 5. This might be expected. Often, spin-off shares do not do well. Moreover, investors want to learn more about the company, so there is a learning process going on. It will be interesting to see if Michael Burry bought more shares as the stock fell, even though it was his fund’s third-largest holding.

Mr. Cooper Group (COOP)

Mortgage Rates
Source: microstock3D / Shutterstock
  • Market Cap: $2.79 billion

The mortgage origination and servicing company Mr. Cooper Group (NASDAQ:COOP) was Leon Cooperman’s fund’s largest holding at the end of Mar. 31. It is unique in that it is a direct-to-consumer mortgage originator, operating without having to pay commissions to mortgage brokers as an underwriter.

Most of the revenue the company makes is from servicing mortgages — about 75% before interest income. However, so far, the company does not pay a dividend, despite being profitable.

Nevertheless, I suspect the reason that Leon Cooperman, who usually likes dividend-paying stocks, has made this his largest holding is because the stock trades well below its tangible book value. The price as of Jul. 5 of $37.58 is just 72% of its $52.01 tangible book value (TBV) per share. That implies that if the stock rises to the TBV per share, it will rise over 38%.

Moreover, the stock is cheap on an earnings multiple basis. It trades for 13.6x this year’s earnings and 5.8x earnings for 2023.

The problem is the stock has fallen a good deal this quarter. It fell 19.5% from $45.67 down to $36.74 at the end of Jun. 30. Knowing how trading-prone major hedge funds can be, I suspect that it is likely that Cooperman has reduced his stake in the stock. We will know more when his fund files another 13-F Securities and Exchange Commission filing near the end of July.

Stocks Hedge Funds Love: Alphabet Inc. (GOOG)

GOOG stock: letters spelling out google
Source: rvlsoft / Shutterstock.com
  • Market Cap: $1,430 billion

Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL) is the largest search engine business in the world and makes over 80% of its income from advertising.

This is Cooperman’s second-largest holding. Analysts forecast that the stock will make $111.54 per share this year, down slightly from $112.20 last year. Next year, analysts forecast EPS of $132.55, putting the stock on a forward P/E multiple of 17.1 times.

Moreover, Alphabet will undergo a 20 for 1 stock split on Jul. 15. The price will be reduced by 20x. The number of shares held will be 20x greater by all shareholders. That may have a positive effect on the stock price, although it is down 21.5% year-to-date.

Interestingly, this stock is also Michael Burry’s fourth-largest holding, so these two great hedge funds minds think alike.

Apollo Global Management (APO)

Apollo Global Management logo on website. APO stock.
Source: Casimiro PT / Shutterstock
  • Market Cap: $28.3 billion

Apollo Global Management (NYSE:APO) is a large private equity money management firm that recently merged with Athene Holding Ltd, an insurance holding company. It was Leon Cooperman’s third-largest holding at the end of 2021, so he likely still owns this stock.

Apollo Global Management is cheap and trades for 9x this year’s earnings and 7.5x the forecasts for next year. Moreover, the stock pays a dividend of $1.60 per share, which gives it a yield of 3.13% at the Jul. 5 price of $51.07. However, this is lower than the $2 annual rate the company had prior to the merger at the end of 2021.

In effect, the company is now two different financial services companies under one roof: Apollo, the alternative asset management firm, and Athene, the retirement services company.

It will be interesting to see if Cooperman still has this as his third-largest holding, especially given the dividend cut. Investors should find out some time later this month if he files another 13-F by then.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.

Article printed from InvestorPlace Media, https://investorplace.com/stocks-hedge-funds-love-in-a-recession/.

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