Billionaire Ken Griffin’s Citadel Bought This Stock
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According to a 13G filed with the SEC, Citadel Investment Group owns just over 30 million shares of LSI Corporation (NASDAQ: LSI). At the end of June Citadel, which is managed by billionaire Ken Griffin, had owned 25 million shares and this had represented a doubling of the fund’s position from the beginning of April. Find more stocks that Citadel bought during the second quarter. LSI provides semiconductor products which are used for data storage and transmission. Its stock has slightly underperformed the market so far in 2012, rising only 6% compared to the S&P 500’s gain of over 10%.
LSI’s business has been growing rapidly. In the second quarter of the year, its revenues were up 32% from the same period in 2011 and its operating income nearly doubled; research and development expenses increased 20%. Net income was abnormally high in the second quarter of 2011 due to a gain that the company recorded in that period, so a comparison there is not meaningful. Cash flow from operations was positive in the first half of 2012, and was used in acquisitions (of SandForce, a storage technology company) and share buybacks. About $77 million in SandForce-related revenue was recorded in the first half of the year, making it responsible for about a quarter of LSI’s total revenue growth over the first half of 2011 and 6% of the company’s total sales. At a market capitalization of $3.6 billion, LSI Corporation trades at 22 times trailing earnings as the market expects strong earnings to continue. Going by analyst estimates, the forward P/E is 8 and the five-year PEG ratio is 0.5; the sell-side therefore believes that the company is undervalued at current prices, with investor expectations of future growth not being optimistic enough.
Our database of 13F filings shows Citadel as the largest hedge fund holder of the stock at the end of the second quarter, but Iridian Asset Management was close behind as that fund reported owning 24 million shares of LSI Corporation. Iridian is managed by David Cohen and Harold Levy, and its position was worth over $150 million at the end of June (research more stocks that Iridian had $150 million invested in). Arrowstreet Capital, which has over $25 billion under management, reported owning 8.8 million shares of LSI at the end of the second quarter (see more stocks that Arrowstreet owns).
LSI’s peer group includes semiconductor companies Microchip Technology (NASDAQ: MCHP), Marvell Technology Group Ltd. (NASDAQ: MRVL), NXP Semiconductors NV (NASDAQ: NXPI), and STMicroelectronics N.V. (NYSE: STM). Marvell, which is known as a favorite of billionaire David Einhorn’s, looks like the best value on a quantitative basis as the microprocessor circuits company trades at 11 times trailing earnings and 8 times estimated earnings for the fiscal year ending in January 2014. Its stock price has collapsed 42% in the last year, about in line with the 52% decline in earnings in its last quarter compared to a year earlier. NXP, which makes signal amplifiers and other products, had very low earnings in the last few quarters but its forward P/E is only 8 as Wall Street analysts expect substantial near-term growth. Statistically, its stock price is highly dependent on the broader market as it carries a beta of 3.6. If an investor is willing to take on that level of risk it could be worth investigating further.
STMicroelectronics is expected to be slightly unprofitable this year, with its revenues falling 16% in its most recent quarter compared to the same period in the previous year, but recover in 2013 and so it trades at 14 times forward earnings estimates. We don’t feel particularly attracted to the company given its recent performance. Microchip Technology has a similar forward P/E of 13, and also trades at 21 times trailing earnings, but its business has also been decline recently: the second quarter saw decreases in revenue and earnings of 6% and 21%, respectively. We would avoid this stock as well.
The entire peer group is doing poorly, so it is interesting to see LSI growing its own business at a fast rate. On a forward basis it is actually cheap compared to similar companies, and so we think that Citadel may have made a good investment decision here.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend NXP Semiconductors . 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.