Top Stocks From Elite Portfolio Managers

By Federico Flom - August 31, 2012 | Tickers: CI, EQIX, PSX, WMT | 0 Comments

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While many great investors have a variety of approaches and investment criteria, what binds them together are three basic characteristics: 1) they exude emotional discipline, 2) they possess a robust framework for making investment decisions, and 3) they apply original research and independent thinking. Successful investors also realize that investing is a journey, sometimes over a rather bumpy terrain. But, the decision making must be a patient process, requiring hefty amounts of perseverance and commitment. I like to study new positions from respected hedge fund investors. In this article I detail the stocks I think are attractive to buy and which gurus bought them in the last quarter.

The first stock is Equinix (NASDAQ: EQIX). John Paulson started a new position in EQIX for his long portfolio last quarter.  EQIX reported solid top and bottom line growth. The company reported Q2 earnings of $0.76 per share, $0.15 better than consensus analyst expectations while revenues rose 18.1% year/year. I think the most important factor was that management raised guidance again. Management forecasts fiscal year revenues of $1.92 billion from prior guidance of 'greater than $1.89 billion' vs. $1.91 billion consensus estimates. "Equinix delivered another strong quarter of financial results, which positions us well to meet our 2012 objectives," said Steve Smith, president and CEO of Equinix. "Our ability to optimize data center capacity and operate efficiently as we expand our global footprint to meet customer demand reinforces our leadership position and supports our long-term growth opportunity."

I have a price target of $225 based on two key factors. First, a positive outlook for global data center demand. Second, despite EQIX's outperformance, current valuation does not appear to price-in any upside from a REIT conversion, which I view as likely in 2014. In Warren-Trades newsletter, we recommended shares when they traded at $145.

The second stock is Wal-Mart (NYSE: WMT). George Soros started a position in WMT last quarter. Wal-Mart has a significant exposure in the expanding international markets. With retail operations in 26 countries, the international segment of the company is now among the top 3 largest retailers in the world, due to new store growth, positive comparable store sales and accretive 2011 acquisitions such as Massmart and Netto. The acquisition of a 51% stake of
Massmart Holdings Ltd in March 2012 has given an opportunity to Wal-Mart to capture the fast growing markets of South Africa.

I think that Wal-Mart could become in a successful international retail growth story. Sales in the international segment have continuously risen from 97.4 billion in fiscal 2010 to $109.2 billion in fiscal 2011 and $125.9 billion in fiscal 2012. I think the same growth momentum will continue going forward and Wal-Mart will continue to focus on improving its profitability and returns from its international operations. Another fact I like from the company is that Wal-Mart returns value to its shareholders by increasing its dividend every year since it first declared its dividend in March 1974. This also reflects that Wal-Mart has been able to grow its free cash flow per share at an impressive rate over the same time period.

I also was interested in Philips 66 (NYSE: PSX), Warren Buffett´s new position. PSX´s management team is working to improve results across the company's businesses, with an emphasis on growing high-return operations and scaling back less profitable assets. In addition, management is focused on boosting shareholder returns through stock repurchases and regular and special dividends, and has initiated a quarterly dividend of $0.20 per share. The company could also ultimately create an MLP as another means of boosting returns. PSX, which was spun off on May 1 from ConocoPhilips, is an integrated downstream company with a leading position in all of its three business segments: Refining & Marketing, Gas Gathering & Processing, and Petrochemicals. PSX's business strategy is to de-emphasize refining, while aggressively expanding its two other businesses, maximizing return on capital by investing in profitable growth and controlling costs. The company intends to grow its cash dividend and repurchase its shares, while maintaining strong financial flexibility. I believe this unique asset mix, large scale and balanced operations give PSX a competitive advantage throughout the business cycle.

Cigna (NYSE: CI) is a stock that top investors bought in the last quarter. Both David Einhorn and David Loeb initiated a position last quarter. Similar to Equinix, Cigna reported strong results last quarter. The company reported Q2 earnings of $1.52 per share, $0.11 better than consensus estimates while revenues rose 35.4% year/year to $7.46 billion vs. $7.22 billion consensus. The company raised its top end guidance for FY12. I think the company is benefiting from HealthSpring acquisition and the effective execution its global growth strategy, which continues to yield strong revenue and earnings contributions. Cigna forayed into the Medicare Advantage market by acquiring HealthSpring Inc. This acquisition instantly made the company a big player in the Medicare Advantage, the U.S. health plan for the elderly and disabled, a market where it was virtually nonexistent. Cigna was unenthusiastic about entering this line of business segment since it lacked the required expertise. However, HealthSpring, which focuses on the elderly population and makes targeting the ABD (aged blind and disabled) population, has made it very feasible for Cigna to enter this market. The acquisition would triple the number of Medicare customers it serves to 1.75 million.

Finally, I think that David Loeb´s News Corp. (NASDAQ: NWS) is an interesting stock to analyze. The most important event from News Corp was its spin-off from its two main segments.  News Corp is restructuring its business into separate publishing and entertainment assets. I think that Daniel Loeb see this as a signal that management is taking shareholder-oriented actions to unlock value. A spin-off could represent two key drivers for the stock: 1) shedding exposure to Europe and the secularly challenged publishing assets; and 2) potentially isolating the overhang of the phone hacking scandal. Daniel Loeb is an expert at analyzing sum of the parts valuation opportunities so I am sure that this company is very interesting for a further research.

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