Avalon Advisors’ Big Buys in the Fourth Quarter

Aubrey is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Avalon Advisors Llc is an investment manager of wealthy families, foundations, endowments, and trusts. The firm, which manages $1.46 billion worth of assets as of the end of December 2012, is one of the top fee-only advisers whose competitive advantage is to bring its clients’ tax-efficient, risk-adjusted returns.  Let’s take a look at the investment manager’s huge buys for potential investment ideas.

In the fourth quarter, Avalon  bought significant amounts of shares in Oracle (NYSE: ORCL) and Procter & Gamble Co. (NYSE: PG). Likewise, it initiated positions in Citigroup (NYSE: C), Maxim Integrated Products (NASDAQ: MXIM), and Goldman Sachs (NYSE: GS). In this article I'll briefly analyze each stock in a simplistic and intuitive approach.

Sources: Whalewisdom.com, Finviz.com, and Nasdaq.com; as of Feb. 8, 2013

Oracle Corporation

The investment manager doubled its holding in Oracle in the fourth quarter, a position that was initiated only the third quarter. As of the end of December last year, the holding was equivalent to 1.12 percent of the firm’s total portfolio. Back then, shares of Oracle were selling for roughly $32.00. As of publication time, it has gone up by about 9 percent to $34.90. Its growth prospects show this is likely to continue as the company continues to develop an edge in the sector. For instance, Oracle has just announced a $2.1 billion acquisition of networking specialist Acme Packet (APKT). This and other acquisitions the company has recently made show the company’s intent to continue beefing up its telecoms business.

Looking at its fundamentals, the company is very attractive indeed. The trends of EPS, margins, sales, and dividend payments are all very good.  Its latest quarterly revenue growth of 3.43% for November, 2012 is higher than that of the same period in the previous year at 2.45%. The company has exceeded EPS estimates in the fiscal quarter ending in November 2012, and the dividend growth is remarkable. The annualized dividend almost doubled from 23 cents in 2011 to 42 in 2012. The company paid dividends five times last year as shown in the figure below. With a healthy P/E ratio of 16.46 and PEG at 1.38, you should be sleeping well if you’ve made the same decision that Avalon Advisors had taken.

Source: Ycharts.com

Source: Nasdaq.com

Procter & Gamble Co.

Avalon went on a buying spree for P&G shares in the fourth quarter; it increased its shares six-folds. This brought the stake to 198,105, or 0.92% of the firm’s total portfolio. The stock price has jumped from under $70 towards the end of the fourth quarter to around $75 as of publication date.

Indeed, the leading consumer packaged goods company is growing robustly. P&G has been surpassing earnings consensus estimates for the past 4 quarterly reports. Revenue is picking up impressively, with the most recent growth at around 2 percent. This stock is highly favored not only for its leadership in the market but because it is a powerhouse in terms of dividend growth and safety; the annualized amount has just inched up 7.5% from $2.056 in 2011 to $2.21 in 2012. With its current growth trends and prospects, the robust growth in the stock price is likely to continue.

Source: Ycharts.com

Source: Nasdaq.com

Citigroup

Avalon initiated a position in Citigroup worth $12.98 million, which is equivalent to 0.89% of the firm’s portfolio. As of the end of December 2102, the stock price was a much lower level, at about $35. Today, as of publication time, the price has gone past $42.  Citigroup is now at the final phase of a spinoff with its hedge fund unit previously managed by the company’s division - Citi Capital Advisors, now renamed as Napier Park Global Capital. The company has exhibited a large jump in net income in the fourth quarter; from 31 cents a year earlier, earnings per diluted share reached 38 cents. However, it has failed to meet earnings expectations by a notable margin of 20 percent. This is attributed to increased litigation costs and lower benefits from releasing loan-loss reserves, reports noted. Despite this, Citigroup remains strong for its wider margins and healthy valuation. The profit margin for the end of 2012 at 5.35% was notably higher than that in the previous year’s 4.25%. It has a healthy P/E ratio of 17.14 and a PEG at 1.47. Its dividend payment  also remains stable at 1 cent per share.

Source: Nasdaq.com

Maxim Integrated Products

Avalon also initiated a position worth around $12.75 million in Maxim Integrated Products in the fourth quarter. The stake comprised 0.87 percent of the manager’s portfolio. From the end of the year to publication period, the stock price has already gained about 10 percent (that is from about $29 to $32). Maxim, a company that designs and develops integrated circuits, faces significant growth opportunities for its relationship with the leading smartphone maker Samsung. This is in light of the expectations that the global market for smartphones will reach $259 billion in less than 3 years time.

The fundamental numbers show why Avalon favors Maxim. For one, the company has surpassed earnings expectations in all four quarters of 2012 with a surprise rate that ranges from 2 to 22 percent.  This partly attributes to the profit margin remaining at a double-digit rate despite a downward trend. The 2.36% quarterly revenue growth (year-on-year) in the fourth quarter is an encouraging recovery from the negative growth in the preceding quarters.  Moreover, with its yield of 2.97%, Maxim is a top dividend stock with an impressive record of stable and increasing payments, the latest of which is 7 percent above that of the earlier year. From 2006 to 2012, the annualized dividend grew by an average rate of 12 percent.

Source: Ycharts.com

Source: Nasdaq.com

Goldman Sachs

The investment manager initiated a significant position of 80,910 shares in Goldman Sachs in the fourth quarter, which is equivalent to 0.71% of its total portfolio. This shows excellent timing because the stock price had gained quite an impressive growth of 25 percent from the end of December to time of publication (that is around $120 to $151). Analysts attribute this surge to its strong financial position and the recent sale of its shares in Industrial & Commercial Bank of China, deemed as a cut to its non-core business.

The company has been performing well in terms of earnings, surpassing expectations in all quarterly reports in 2012, with high surprise rates that range from 10 to 61 percent. Revenues had grown robustly; its quarterly revenue grew by 38.81% year-over-year based on finviz.com compiled data as of Feb. 8. Meanwhile, profit margin remains at a double-digit growth. With a healthy valuation as shown by its P/E ratio of 10.71 and PEG of 1.55, and a dividend record that did not falter even during the financial crisis, this stock is highly favored by those seeking safe dividend income.

Source: Nasdaq.com

I am deeply impressed with the mix of big buys that Avalon Advisors had in the latest quarter. It greatly shows its superior ability in managing its portfolio by choosing not only those that have promising growth potentials and improving margins but those which exhibit excellent dividend growth and safety.


aubrey1102 has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs and Procter & Gamble. The Motley Fool owns shares of Citigroup Inc and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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