Exclusive Picks From Top Investors
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
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 who consistently generate alpha. In this article I detail stocks that top investors bought last quarter.
McKesson (NYSE: MCK). Top investor Paul Tudor Johnes increased 149% his position from the previous quarter. McKesson is the largest player in a three-firm oligopoly (along with Cardinal Health Solutions and AmerisourceBergen) that dominates domestic pharmaceutical distribution in the U.S. This is an industry that has stability and MCK offers strong top-line visibility following the renewal of its Veterans Affairs contract. I think that Tudor Jones invested in MCK because earning visibility is high considering margin expansion opportunity from generics, low risk of customer loss over the next twelve months, rebound in the IT business and solid cash deployment. McKesson remains in sound financial health, with $3.1 billion in cash on hand at the end of fiscal 2012 and a gross debt-to-capitalization ratio of around 37%, one of the lowest percentages in the pharma sector. During fiscal 2012, McKesson repurchased shares worth $1.9 billion and recently management authorized additional share repurchase of up to $700 million bringing the total authorization to about $1 billion. I think that the buyback program highlights management commitment to return value for shareholders. At its investor day in June 2012, McKesson stated that it has returned $7.5 billion to stockholders through share repurchases in the fiscal 2007-2012 time period, representing 44% of the capital deployed during that period. MCK is also a top income stock. The company´s dividend per share has jumped 233% in the fiscal 2007-2012 time period.
Another interesting pick is Electronic Arts (NASDAQ: EA). Hedge fund manager Kyle Bass from Hyman funds initiated a position, which is 8.43% of his long portfolio. I think that EA investors are encouraged from the last company´s results. EA´s 1Q results were at the high end of its guidance, and the company reiterated its fiscal year guidance. I liked to see that Digital revenue continues to accelerate, accounting for 2/3rds of 1Q revenues, with strong growth expected to continue. I think this is the key area that Kyle Bass focused to analyze. Digital is the future of gaming. I believe that EA is very well positioned to outperform most of its major publishing peers. I also got encouraged by the fact that the company announced that its Board of Directors has authorized a program to repurchase up to $500 million of EA's common stock.
I like to evaluate what top value investors are buying. Leon Cooperman increased 213% his position in American International Group (NYSE: AIG). I think that AIG is a top recovery play. The gradual recovery in the economy and equity market, post the downturn in 2008, has helped AIG to recoup the value of its investments, an event that is essential to evaluate AIG fundamentals. The appreciation has also helped the company to pay off AIA special purpose vehicle (SPV) preferred interests, the FRBNY credit facility and the ALICO SPV preferred interests in full. The loans against Maiden Lane II and III investment vehicles have also been fully repaid, while the company also regained its equity interest worth $6 billion in Maiden III.
Additionally, this also aided the company in disposing of its redundant and risky businesses at attractive valuations, which in turn has helped in consistent improvement in the financial leverage along with the reduction in interest expenses. AIG´s cash flows metrics are performing better too. Consistent payoffs along with strategically divested assets also led to an operating cash flow of $1.63 billion at the end of June 2012, which surged from an outflow of $3.54 billion in the prior-year period. Moreover, as of June 2012, AIG s DIB, a runoff
portfolio which also includes the interest of Maiden Lane III, had excess liquidity worth $5 billion, while more than 50% of DIB s debt is scheduled to mature in next 5 years, thereby enhancing capital flexibility and buoyancy for long-term growth. AIG offers both growth and value.
The next top stock is Google (NASDAQ: GOOG). Hedge Fund guru David Tepper increased 37% his position from previous quarter. In the last earnings report Google showed great results and I think the market got very optimistic about mobile opportunities. Google reported in-line 2Q operating results, reflecting stability in its core advertising business. Excluding the impact of Motorola Mobility, net revenues grew +21% y/y, in line with consensus analyst estimates. I view 2Q12 results as solid given the macro economic challenges in Europe and declining CPC rates. Mobile continues to grow rapidly and I believe this positions Google solidly for future growth. I own Google by following a recommendation from Warren-Trades newsletter.
It is very interesting to evaluate GameStop (NYSE: GME). Joel Greenblatt increased 26% his position in the recent quarter. Greenblatt likes to buy good companies trading at inexpensive prices. GameStop current price earnings multiple is 6.5x, compared with 12.6x industry average and 14.3x for the S&P 500. Over the last five years, GameStop´s shares have traded in a range of 5.7x to 45.1x trailing 12-month earnings. The stock is also trading at a discount to the industry average, based on forward earnings estimates. Greenblatt is interesting in a potential turnaround from GME´s digital segment. The video gaming industry has been shifting from retail to digital for the past few years. A growing number of games are now being published digitally. Casual browser based gaming and mobile gaming has become a significant part of gaming revenues and is expected to continue to increase in the future. GameStop has also changed its strategy to focus its sales on a mix of retail and digital gaming products. The recent strategic acquisitions of several digital properties such as Impulse, Spawn and Kongregate reinforce the former point. In the last earnings report new video game hardware sales plunged 33.5% to $183.3 million, whereas new video game software sales dropped 21% to $473.8 million. Moreover, used video game products sales declined 11.2% to $562.3 million. However, sales in other category jumped 40.6% to $330.8 million. Within other category, Digital revenue increased 27% year over year to $134 million, whereas Mobile sales, consisting of tablet and pre-owned iDevice products, came in at $29 million. I think that Greenblatt thinks that GME can grow its Digital segment and create a solid strategy combining both offline and online presences.
I think that is essential to buy solid companies and assess properly the risk/reward profiles of each potential investment. My framework for considering investment opportunities is summarized throughout the following five key questions:
- Is this a good business run by smart people ?
- What is this company worth ?
- How attractive is the price for this company, and what should I pay for it?
- How realistic is the most effective catalyst ?
- What is my margin of safety at my purchase price ?
I think the similar criteria is used by highly successful and well-known value investors. From the stocks mentioned in the article, Google is my top choice. Why? Google is a top business run by a proven management team, the company is worth more than the current valuation and the most effective catalyst is a strong monetization from the company´s mobile and video properties. Google offers an attractive 25% margin of safety according to my models.
markadams12 has no positions in the stocks mentioned above. The Motley Fool owns shares of GameStop and Google. Motley Fool newsletter services recommend American International Group, Google, and McKesson. 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.If you have questions about this post or the Fool’s blog network, click here for information.