Successful $4 Billion Fund’s Top Stock Picks
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John W. Rogers is the founder of Ariel Capital Management. He launched the firm in 1983 with $180,000 from family and friends. In three years, Rogers grew the size of the fund to $45 million. Today, the company is called Ariel Investments and has approximately $4.4 billion AUM. The company’s oldest and one of the largest funds, Ariel Fund (ARGFX), returned 66% over the past ten years, versus 43% for the S&P 500 index. Another large fund, Ariel Appreciation Fund (CAAPX), was also up over 70% in the past decade, beating the market by 27 percentage points. Ariel has a strong track record and that’s why we have been tracking its move. Let’s take a closer look at Ariel Investments’ most recent bullish bets.
Interpublic Group Companies Inc (NYSE: IPG) is the largest position in Ariel’s latest 13F portfolio. Rogers boosted his stakes in this position by 5% during the fourth quarter. At the end of December, Ariel had $167 million invested in IPG. IPG has an impressive record of earnings and revenue growth. On February 24, the company released strong fourth-quarter and full-year results. Its annual revenue in 2011 was $7.01 billion, up 7.7% from $6.51 billion for 2010. Fourth-quarter 2011 revenue was $2.07 billion, up 3% from $2.01 billion in the fourth-quarter of 2010. Its fourth-quarter net income was $259 million, or $0.58 per share, versus $195 million, or $0.41 per share for the same quarter a year ago. Additionally, the company announced a quarterly dividend of $0.06 per share. IPG is currently trading at $11.39 per share. So it has a decent dividend yield of 2.11%, versus 2% for 10-year Treasury bonds. IPG has attractive valuation levels too. Its P/E ratio is 12.84, versus 14.70 for its main competitor, Omnicom Group Inc (NYSE: OMC). Additionally, IPG’s EPS is expected to grow at 17% per year over the next couple of years, beating the estimated 10% for OMC.
We like IPG. So do hedge fund managers. There were 25 hedge funds with IPG positions at the end of December. Ray Dalio’s Bridgewater Associated had $13 million invested in IPG at the end of the third quarter. Bridgewater still had about $10 million invested in this stock at the end of 2011. Billionaire Steve Cohen’s SAC Capital boosted its stake in the company to $45 million during the fourth quarter.
Lazard Ltd (NYSE: LAZ): LAZ is the second-largest position in Ariel’s 13F portfolio. The fund also had more than $160 million invested in LAZ and increased its stakes by 7% over the fourth quarter of 2011. LAZ was not very popular among hedge funds though. At the end of the third quarter, eight hedge funds reported to own LAZ in their 13F portfolios. Chuck Royce, Ken Fisher, Jim Simons, and Jacob Gottlieb are among the hedge fund managers with LAZ positions last year (see billionaire Jim Simons’s top picks).
We do not think it is a good time to purchase LAZ. There are several other financial stocks that are trading at much lower multiples. LAZ’s current P/E ratio is 22.5 and its forward P/E ratio is 13.09, while JPMorgan Chase & Co (NYSE: JPM) has a current P/E ratio of 8.61 and a forward P/E ratio of 7.18. Although LAZ is expected to grow at higher rates, we do not think the price premium is worth paying. Moreover, the company’s net income is also deteriorating. It experienced a steep decline in earnings recently. For the fourth quarter of 2011, LAZ reported net loss of $4.8 million, versus net income of $100 million for the same period a year earlier. Its revenues also fell by 24% to $473 million.
A few other large positions of Ariel are Gannett Co Inc (NYSE: GCI), Jones Lang LaSalle Inc (JLL), Mohawk Industries Inc (MHK), and Janus Capital Group Inc (JNS). Ariel boosted its JNS stakes by 10% over the fourth quarter, while slightly reduced its stakes in the other three positions. At the end of last year, Ariel had over $130 million invested in all these positions. We are bullish about Gannett. The stock has a very low forward PE ratio because of concerns about secular declines in print advertising. Its forward PE ratio is around 7 and the stock yields 5.5%. We think Gannett is worth the risk. On the other hand, JLL and MHK’s P/E ratios are relatively higher (above 20). But their expected growth rates are much higher too. They are expected to grow at about 20% annually. We are generally skeptical about high growth high PE stocks because the margin of safety is quite low for these investments.
We like Rogers and Ariel Investments. The firm mainly focuses on investing in undervalued small and medium-sized companies. We think it is a good idea for investors who want some exposure to small-cap or medium-cap companies to research Rogers’ top stock picks.
The Motley Fool owns shares of JPMorgan Chase & Co. Meena Krishnamsetty does not own shares in any of the companies discussed in this article. 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.