5 Key Bets Made By ‘Magic Formula’ Man Joel Greenblatt
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Joel Greenblatt is well known in the value investing community, having penned a number of books on investing, including You Can Be A Stock Market Genius, in addition to developing his famous “Magic Formula” strategy. Greenblatt focuses primarily on special situations, and some of his investing activity is reported to the SEC via 13F filings. Outlined below are five of Gotham Asset Management's most important bets heading into the new year (check out Joel Greenblatt's latest picks).
Express (NYSE: EXPR) saw Gotham increase its stake almost 90% last quarter. The clothing retailer posted 3Q results of $0.20 compared to $0.37 year over year. The decline was on the back of 5% lower comp sales and 4% lower sales due to a weak global economy and consumer spending. The retailer recently revised 4Q earnings downward and now expects comp sales to decrease in the low-single digits. With the weakness, the retailer is now the cheapest in the industry at 9x earnings, compared to Rue 21 (16x), Aeropostale (16x) and Gap (15x). Although the stock has seen pressure of late, we believe it could be a solid value opportunity trading at a PEG of only 0.5; its long-term expected EPS growth rate is a whopping 19%.
Deluxe Corporation (NYSE: DLX), meanwhile, saw Gotham up its stake 50% last quarter. Deluxe should manage to see positive performance as economic activity improves in the interim, but a longer-term headwind is the rise of online storage and payment processing, which is decreasing the need for printing. We remain cautious on the printing industry's prospects given the rise in digital and electronic technologies. Deluxe's potential, then, remains limited and its 5-year expected EPS growth rate is a low 6%.
Nu Skin Enterprises (NYSE: NUS) saw Gotham increase its stake 150% last quarter. Nu Skin sells personal care products in a space that has been seeing pressure lately, due to a continually elevated unemployment rate. Additional issues will come from lower-priced competitors, but the majority of problems over the interim may be related to the Herbalife fallout, which we'll discuss below. Still, the company's long-term growth prospects look robust, as exhibited by its 5-year expected earnings growth rate of 17%. Nu Skin calls billionaire Jim Simons as one of its big name investors (see all of Jim Simons' top picks).
Who are the remaining two?
Pitney Bowes (NYSE: PBI) saw Gotham up its stake 90% last quarter. The mail equipment and supplies company saw total revenues down 6% in 2012 and are expecting a decline of 1% in 2013. Driving Pitney's weakness has been a soft economy and software replacing much of the company’s key equipment. We believe that tech innovations will continue to pressure this particular industry, further reducing the need for postal supplies. A poor performance outlook is already seen on the sell-side, which expects Pitney's bottom line to shrink by an average of 5% a year over the next half-decade. Interestingly, one of Steven Cohen's SAC Capital subsidiaries took a new stake last quarter (check out Steven Cohen's top bets).
Last but certainly not least, Herbalife (NYSE: HLF) has seen extraordinary pressures of late. Gotham took a new position in the now flailing nutrition stock last quarter. Following the announcement that Bill Ackman is short, Herbalife has tumbled over 40%. Ackman has brought to light concerns over sustainability and profitability, namely labeling the company a pyramid scheme.
We believe that Gotham will continue to support Herbalife given he was also buying Nu Skin on its weakness during the summer. Herbalife trades as one of the cheapest stocks in the industry at only 7x earnings, but also has solid growth prospects given the generally bullish outlook that most hold over the health products industry.
To recap: Gotham Asset Management has big bets in extraordinary places, including a 150% increase in skincare (Nu Skin) and new position in nutrition (Herbalife), both of which are facing pressures related to business model concerns. Gotham’s other big increases were in the retail space as well as the business sector, with Pitney and Deluxe. It appears that Greenblatt is betting on a rebounding economy in 2013.
This article is written by Marshall Hargrave and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.
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