$2 Billion Hedge Fund's Top Stock Picks

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There are Tiger Cubs, and then there are Tiger Cub Cubs. David Stemerman, who founded Conatus Capital Management in 2008, is one of the latter: he previously worked at billionaire (and Tiger Cub) Stephen Mandel’s Lone Pine Capital. He also has degrees from both Harvard Business School and Harvard Law School. Conatus, despite being a relatively new fund, already has about $2 billion in total assets under management. We have data on which stocks Conatus reported owning on its 13F filing for the second quarter. See the full list or read on for our quick take on their five largest positions.

Apple (NASDAQ: AAPL) was the most popular stock among hedge funds in the second quarter of 2012 (see the full list of the ten most popular stocks) and it was Conatus’ largest holding with the fund reporting a position of about 210,000 shares. Despite its massive size Apple’s growth keeps right on coming, with earnings in its last quarter coming in over 20% higher than a year ago. The company may be bumping up against growth limits as competition picks up in the tablet and smartphone markets, but it still is a growing company with a powerful brand with a trailing multiple of only 16.

The fund’s second largest position, according to the 13F, was its roughly 800,000 shares of Visa (NYSE: V). Visa is another popular stock among hedge funds and other notable investors: it leads our list of the most popular services stocks among hedge funds for the second quarter. According to Wall Street analysts, Visa should turn in about $7.15 per share in earnings in its next fiscal year, ending in September 2013; hitting this target would yield a forward P/E multiple of 19. Like Apple, it is a market leader in its industry and does not seem too expensive if it can deliver on earnings expectations.

Google (NASDAQ: GOOG) joined Apple as one of the top stocks among hedge funds, and it joined the larger tech company at the top of Conatus’s portfolio as well. Google is another large tech company that is still growing at double-digit rates, with both its revenue and earnings rising over the last year. It trades at 22 times trailing earnings and 15 times forward earnings estimates- at a slight premium to Apple, which likely captures the opportunity that the company has to win further market share in the tablet and smartphone markets away from its chief competitor.

Stemerman and his team also liked Priceline.com (NASDAQ: PCLN); although they cut the fund’s stake in the travel website to about 130,000 shares, it was still one of the five largest holdings in the portfolio. Priceline has a good growth case going for it; in its most recent quarter, revenue was up 20% and earnings were up 37% compared to the same period in the previous year. As might be expected, the market is pricing in considerably fewer growth and the stock trades at a trailing P/E of 26. However, the sell-side thinks that this is about right with the forward P/E coming in at 17 and the five-year PEG ratio being 1.

Conatus owned about 350,000 shares of Amazon.com (NASDAQ: AMZN). Amazon is another high growth stock, but we’re considerably more worried about its valuation than that of some other companies on the list. It trades at 310 times trailing earnings, 108 times consensus earnings for 2013, and its five-year PEG ratio is 9.8. Amazon is a transformative company which has many growth avenues ahead of it, and from a strategic point of view its plan to offer same-day delivery in many large U.S. cities sounds attractive, but these numbers sound too high for us. 

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has long positions in Apple and Google. The Motley Fool owns shares of Apple, Amazon.com, Google, and Priceline.com. Motley Fool newsletter services recommend Amazon.com, Apple, Google, Priceline.com, and Visa. 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.

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