Do You Agree With This Billionaire’s Bearish Bets?
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Paul Singer founded Elliott Associates in 1977, and since then has taken an activist approach to investing. Singer takes meaningful positions in companies that are distressed and underperforming in an effort to encourage management to unlock shareholder value, either by a spinoff or a reorganization. Singer holds a BS in psychology from the University of Rochester and a JD from Harvard. Before founding Elliott, Singer spent time at various law firms and DLJ. In reviewing Singer’s most recent 13F filing, we found five stocks that he was selling during the third quarter (check out Singer's newest picks).
VMware (NYSE: VMW) is expected to see total revenues up 17% in 2013 on the back of server virtualization trends. These trends should eat up a good portion of company IT budgets going forward, so why is Singer selling out of this virtualization leader? At first glance, VMware trades well above its peers at 55x earnings, but its forward P/E of 30x suggests investors may still be under-appreciating the stock.
Despite an uncertain economic outlook, the expected spending on cloud computing remains strong. The strength in VMware’s virtualization software continued last quarter, with enterprise license agreements up 24% year over year. One negative for VMware is that earnings growth is slowing. The sell-side expects it to grow EPS by 22-23% a year over the next half-decade; this is far below the 45% growth rate VMware has averaged since 2007. Billionaire Jim Simons is still VMware's top fund owner, but also reduced his stake by 40% last quarter (see Jim Simons' top picks).
Nike (NYSE: NKE) recently divested its Cole Haan and Umbro brands in an effort to better focus its operations. Nike has a global presence, but weakness in China brings to light growth concerns. The shoe company’s initiatives to align products with the Chinese economy will also lead to elevated marketing expenses, which will pressure margins over the interim. A build-up of inventories in this region is also a cause for concern.
This leads us to question the shoe company’s valuation. Sales from China saw 20% growth two quarters ago, but then a 6% growth decline last quarter. Nike’s current P/E of 20x is above its major peers Steven Madden (16.6x) and Adidas (17x). Interestingly, billionaire Ken Griffin - founder of Citadel Investment Group - is still one of Nike's top owners after a 600% stake increase last quarter (see Ken Griffin's latest picks).
Dicks Sporting Goods (NYSE: DKS) saw a 7% sales increase in 2012 and future growth will be driven by store expansion. A increased focus on outdoor and fitness products will lead the charge, but one headwind for the stock will be continued weakness in the overall economy, which limits discretionary spending.
Dicks Sporting Goods does trade in line on a P/E basis with peers, despite its expected continue rapid store expansion. Recent EPS showed higher year over year results, with quarterly 3Q EPS at $0.40, compared to 3Q 2011 EPS of $0.32. This comes on the back of 5% same-store sale growth and 11% higher sales, both on a year over year basis.
Despite Singer’s selloff of DKS, we still believe investors can find value in the stock. Trading at only 15x earnings and paying a modest dividend that yields 1.1%, the stock is a value play with above-average growth prospects. Famed investor Paul Tudor Jones did up his stake by over 1,400% last quarter, so there are still some bulls in the hedge fund industry.
Melco Crown Entertainment (NASDAQ: MPEL) is facing similar pressures as Nike with a potential slowdown in China. Melco was the ninth largest 13F holding for Singer in 2Q and saw a 40% selloff last quarter. The casino company still trades in line with major peers despite its over exposure to the Macanese region of the country. At 22x earnings, Melco is slightly above Wynn Resorts (21x) and Pinnacle Entertainment (21x) on the valuation side. Assuming Melco could put its $1.7 billion cash to work with expansion into other markets, we would be more inclined to consider the stock as a "can't miss" high-growth opportunity.
QLogic (NASDAQ: QLGC) expects revenues to be down 19% in FY2013 after a 2% decline in 2012. This small-cap network infrastructure provider has seen its slowdown caused by a struggling Europe and weak IT spending globally, led by a decline in server sales. A bearish market environment is expected in the near future as well, as overall IT spending is expected to rise at a low single-digit pace in 2013. QLogic looks cheap on the surface at 10x earnings, compared to EMC (21x) and NetApp (26x), but when coupled with its five-year expected EPS CAGR of -6%, it is easy to see why.
To recap: VMware has a leading position in one of the fastest growing tech markets, and Dicks Sporting Goods is one of the few retailers that is looking to expand operations over the interim. We do agree that the China slowdown will have a negative impact on Nike and Melco. QLogic is also expected to continue to see weakness as IT spending lags.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Dick's Sporting Goods, Nike, and VMware. Motley Fool newsletter services recommend Nike and VMware. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!