Billionaire Michael Price’s Top Two Stock Picks
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
MFP Investors, managed by Michael Price, is a New York-based activist hedge fund focusing on value investments. Founded in 1998 after Price sold Heine Securities to Franklin Resources for $670 million in 1996, MFP Investors uses a value investing approach with a dash of contrarianism thrown in for good measure. The hedge fund manager acquired his analytical chops from the late Max Heine, whom Price worked for beginning in the early 1970s.
While most of his portfolio’s holdings are in equities, Price has also been known to dabble in arbitrage tactics and distressed asset classes. In addition to his role at MFP Investors, Price has received national recognition for his philanthropic offerings, most notably those made to his alma mater, the University of Oklahoma. Price’s most important contributions though, are made to his shareholders, as he is known by his peers as one of the most responsive hedge fund managers in the industry.
As can be seen in the hedge fund manager’s 13F filings with the SEC, Price prefers the financial sector, as it accounts for more than one-third of his total holdings. Below, we’ll take a closer look at MFP Investors’ portfolio, particularly at its top two stock picks.
Intel (NASDAQ: INTC)
Taking the top spot in Price’s holdings, the manager holds $35.6 million worth of Intel Corporation, good for 5.1% of his portfolio’s total value. In the past year, the company has been a particularly solid investment, generating a 14.7% return, though this is 70 basis points below industry norms for the time period.
From a valuation standpoint, shares of Intel currently trade at a Price-to-Earnings ratio of 9.8X, far below the industry average (17.7X), and competitors like Texas Instruments (NASDAQ:TXN) at 20.6X, and ARM Holdings (NASDAQ: ARMH) at 53.8X. Moreover, this is also below its own 5-year historical average (17.1X). In fact, over the past half-decade, Intel’s earnings have traditionally traded at a 13% premium over the S&P 500’s average. This year, they are much cheaper, trading at a 34% discount.
Now, there is a moderate amount of bearish sentiment surrounding the company, as management actually lowered its Q3 revenue forecast by 7.7% last week. On the whole, the Street is expecting middling earnings growth over the next two years. Analysts’ estimates predict Intel will reach an EPS of $2.48 by the end of 2013. If this target were to be hit, it would mark a 2-year average annual EPS growth of 0.8%, hardly an impressive figure when considering its averages (37.5%) post-recession.
Going forward, Intel faces the real risk that consumers will continue to turn away from devices that use its chips, such as laptops and desktop computers, for smartphones, which use chips from Texas Instruments, ARM Holdings, and other players in this industry. That being said, a good case can be made that Intel is a “value-trap” at its current price levels. In other words, there are secular reasons behind the stock’s cheap valuation. Until the company can prove that it can stave off these concerns, particularly in its next earnings release, investors might do best to watch Intel from afar.
It should be noted that Michael Price actually increased his holdings in Intel by 24% between the first and second quarters of 2012, so this is definitely a situation worth monitoring. Here’s a full synopsis of the hedge fund industry’s sentiment toward the stock.
West Coast Bancorp (NASDAQ: WCBO)
As the second largest holding in Price’s portfolio, West Coast Bancorp has been a favorite of the hedge fund manager since late 2010. Currently, the stock accounts for 4.8% of MFP Investors’ total portfolio value, a position worth more than $33 million. In 2012 thus far, the stock has been a solid investment, returning a tick under 30%, outpacing the U.S. regional banking industry (27.6%), and the financial sector (15.1%) as a whole.
In its most recent earnings release, West Coast Bancorp beat the Street’s EPS estimates by 7.7%, finishing the second quarter with earnings of $0.28 a share. By year’s end, analysts are expecting the company to report an EPS of $1.08 a share, before expanding its bottom line another 8.1% to $1.17 by the end of 2013. Due to the fact that West Coast Bancorp currently trades at a P/E ratio (11.3X) below the industry average (12.7X) and its larger competitor U.S. Bancorp (NYSE: USB) at 12.5X, its stock has moderate upside if earnings estimates can be met.
Assuming that this is the case, fairly valued shares of West Coast Bancorp can flirt with $25 by the end of next year. They currently trade in the $20 range, making double-digit appreciation a real possibility in the next 12-16 months.
Interested in More?
When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors have understand with the chip giant. Better yet, you'll continue to receive updates as news develops for an entire year. Click here now to learn more.
This article is written by Jake Mann and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel. 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.