Two Value-Plays Held By Brian Kelly’s Asian Century Quest
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Asian Century Quest Capital, managed by Brian Kelly, is a New York-based hedge fund with additional offices in Japan and Hong Kong. The fund holds an estimated $2.5 billion in assets under management, and primarily utilizes a bottom-up, fundamentally focused strategy that invests in long/short equities. As the name would suggest, Asian Century Quest has an emphasis on the Japanese and Korean markets. In fact, as of Brian Kelly’s most recent filing with the SEC, the entire value of his 13F portfolio is a little over $400,000, which is significantly smaller than the manager’s overall AUM.
While we cannot measure Asian Century Quest’s returns in their entirety, it is possible to analyze the returns generated by the U.S.-based stocks reported in its Form 13F. As seen on Insider Monkey’s list of worst performing hedge funds, Asian Century Quest’s 13F portfolio lost 18.3% in the second quarter, making it the third worst performance in the industry, behind Kevin Michael Ulrich’s Anchorage Advisors, and Marc Lasry’s Avenue Capital. Without further ado, here are two stocks that burned Brian Kelly’s fund over this timeframe.
Baidu.com (NASDAQ: BIDU)
Between March 31st and June 30th, shares of China’s most dominant search provider returned -21.5% to fall below $110, before a strong second quarter earnings report pushed the stock back above the $130 mark. Interestingly, the stock has been in the red over the past few weeks amid fears that the company may lose traffic to the newer Qihoo 360 Technology, which is already estimated to have taken 10-15% of the Chinese search engine market share.
At its current price in the $115 range, Baidu trades at a Price-to-Earnings ratio (29.8X) that is far below its own post-recessionary average (55.8X). More importantly, Baidu trades at a PEG ratio of 0.71, meaning that growth-related fears may have pushed this stock’s selloff too far. With EPS growth expected to average 41.9% a year over the next half-decade, fairly valued shares of Baidu can flirt with their previous highs. Brian Kelly seems to agree, as he still holds nearly 14% of his 13F portfolio in the stock, worth a total value of almost $5.8 million.
Melco Crown Entertainment (NASDAQ: MPEL)
Melco Crown Entertainment is the only casino company trading on American exchanges that is entirely focused on the Chinese gambling industry. The company operates in the country’s Macau region, where it has grown its top line by almost 40% a year since 2009, above the Macanese (32.0%), and global (7.9%) casino industry norms. Melco Crown Entertainment finally turned the corner toward profitability in 2011, generating earnings of 55 cents a share, and early estimates predict that the company will grow its bottom line by 31.7% a year through 2016.
Interestingly, the stock trades at a bargain basement PEG ratio of 0.53, below U.S. traded peers like Las Vegas Sands (NYSE: LVS) at 1.11, and Wynn Resorts (NASDAQ: WYNN) at 1.31, so there looks to be some value here. While it appears that investors have not fully noticed Melco Crown Entertainment’s growth prospects, it should be noted that China’s ongoing economic slowdown might prove too strong a headwind to overcome, at least over the next 12-16 months.
Aside from its cheap valuation, we like this stock over the long run because of the various transportation projects that are ongoing in the Macau region. The most notable undertakings include a new high-speed rail network and the Hong Kong-Zhuhai-Macau bridge system, which is expected to reduce the average travel time between Macau and Hong Kong from four hours to a little over 30 minutes. The two projects are expected to be completed around 2015, and will likely provide a nice boost to Melco Crown Entertainment’s facilities here.
As mentioned above, both Baidu and Melco Crown Entertainment are held by Brian Kelly’s Asian Century Quest, and comprise a little more than one-fifth of the manager’s overall 13F portfolio. While both of these stocks did burn Kelly quite badly in the second quarter, it looks like they may provide good value over the long term. For a complete listing of the hedge funds that hold both of these stocks, continue reading here for Baidu, and here for Melco Crown Entertainment.
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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 Baidu. Motley Fool newsletter services recommend Baidu. 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.