Ken Heebner is the founder and chairman of Capital Growth Management, a Boston-based investment firm. Prior to launching CGM in 1990, Heebner worked at the mutual funds management group at Loomis, Sayles & Company. Heebner's performance was stunning before the financial crisis in 2008. He beat the market by six consecutive years from 2000 to 2005. He slightly underperformed the market in 2006, but he outperformed the market again in 2007 by returning an astonishing 80%. However, he lost 48% in 2008. In the following two years, he returned 10.5% and 16% respectively, not enough to cover his losses. Over the past year, CGM Focus Fund lost more than 20%.
It seems that Heebner's performance was unremarkable during recent years. Is he still worth imitating? Let's take a closer look at his latest top stock picks and decide.
United Continental Holdings Inc (UAL): The largest position in Heebner's latest 13F portfolio is UAL. Heebner boosted his UAL stake by 15% over the fourth quarter. As of December 31, 2011, his fund reported owning $175 million worth of UAL shares. UAL is quite popular among hedge funds tracked by us. There were 33 hedge funds with UAL positions at the end of the third quarter. Besides Heebner, Bill Miller and David Tepper were also bullish about UAL. Miller's Legg Mason Capital Management had $129 million invested in UAL and Tepper's Appaloosa Management LP had $78 million invested in the stock.
We like UAL too. We like the "Continental integration" program of the company. We think it will provide some cost and revenue synergies for the company. The company also has compelling revenue growth and a strong record of earnings growth. Volatile oil prices present a risk to the company. But we think the risk is offset by other positive factors of the company. UAL has low valuations. It has a forward P/E ratio of only 3.76 and it is expected to grow at 3.54% per year over the next five years. So its P/E ratio for 2014 is only 3.50. In fact, a few other airlines companies are also trading at low multiples. For example, Delta Air Lines Inc (DAL) has a forward P/E of 4.03. Heebner likes DAL too. CGM had $147 million invested in DAL at the end of last year.
Citigroup (C): C is the second-largest position in Heebner's portfolio. CGM had $171 million invested in this stock at the end of last year. C is also very popular among hedge funds. At the end of the third quarter, there were 87 hedge funds with C positions in their 13F portfolios. For example, Bill Ackman was the most bullish hedge fund manager about C. His Pershing Square had nearly $700 million invested in the stock. Lee Ainslie's Maverick Capital also had over $200 million invested in C.
We agree with these hedge fund managers. We are also bullish about C. We see strong loan growth in corporate lending and increasing net interest margin over the fourth quarter last year. The company also expects to begin returning capital to shareholders this year. We expect an increase in its dividend payouts and some share repurchases. C looks undervalued compared with its peers. Its forward P/E ratio is 7.0 and its EPS is expected to grow at 10.1% on the average over the next five years. This means that its P/E ratio for 2014 is about 5.8, versus 6.1 for Bank of America Corp (BAC) and 15.8 for HSBC Holdings PLC (HBC). HBC looks overpriced while BAC is also attractive. Heebner did not invest in HBC but he also had $123 million invested in BAC.
Some other large positions in Heebner's portfolio are Priceline.com Inc (PCLN), Herbalife Ltd (HLF), and Mastercard Inc (MA). All three stocks have double-digit expected growth rates. Their forward P/E ratios are also all below 20. Heebner increased his position in MA by 36% over the fourth quarter, but he reduced his position in HLF and PCLN by 7% and 13%, respectively. Jim Simons was bullish about all three stocks. His Renaissance Technologies had $154 million invested in HLF, $138 million invested in PCLN, and $118 million invested in MA.
Overall we like Heebner's stock picks. Though his performance was less outstanding recently, we think investors can still benefit from focusing on the most bullish bets of him.
Disclosure: I am long C.
