The next wave of equity opportunities lie in big, “boring” companies that have been largely overlooked in the current rally, according to hedge fund manager Joel Hirsh.
“The companies with the most significant competitive advantages right now are priced as average companies,” said Mr. Hirsh, manager of the $170 million long-short New Millennium Fundamental Hedged Equity Fund LP, which is part of the $1.4 billion managed by Kovitz Investment Group LLC.
Mr. Hirsh's portfolio is currently 60% net long with positions in Lowe's Cos. Inc. (LOW), Wal-Mart Stores Inc. (WMT), Walgreen Co. (WAG) and Automatic Data Processing Inc. (ADP), among others.
“These kinds of companies are not being valued the way they should be, because everyone is looking to get in on the high cyclical trades of things they think will pop when the economy turns,” he said. “But most of those companies have already seen their big gains.”
According to Mr. Hirsh, companies that are viewed as “somewhat boring and less levered to a cyclical recovery” are well-positioned regardless of the strength of the recovery.
“You don't need as strong of a recovery for a company like Wal-Mart to benefit,” he said. “And it's because of where they're trading now that we see such significant upside.”
As a bottom-up stock picker, Mr. Hirsh sees a company such as Lowe's as a long-term play on the housing industry.
“If you're looking at monthly returns you might not be able to own a company like Lowe's, but we're holding it for a housing recovery, and that might take a couple of years,” he said.
“Some of these stocks are priced as if the market is expecting this economic downturn to last forever.”