5 Defensive Plays From Billionaire Ken Griffin
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Billionaire Ken Griffin got his start by trading options in his Harvard dorm room. Having founded Citadel Investment Group in 1990 with only $4 million, Griffin now manages one of the largest hedge funds in the world. He utilizes a model-based strategy focused on quantitative methods. In reviewing Citadel’s recent 13F filing we found five defensive stocks he loves (check out Ken Griffin's new picks).
Procter & Gamble (NYSE: PG) is a consumer packaged goods company trading in line with the majority of its peers. After increasing its stake over 300% last quarter, PG is now Griffin's largest 13F holding. Procter & Gamble trades at 22x earnings, close to Colgate’s 20x and Church & Dwight’s 23x multiples. Worth noting is that Procter does pay a robust dividend yielding 3.6%. Procter & Gamble has been looking to cut down on spending and recently announced plans to reduce costs by up to $10 billion over the next five years. These cost savings could add 10% to its operating margin. Helping insulate the company from too much volatility – with a beta of 0.5 – is its limited exposure to emerging markets – less than 40% of sales. Warren Buffett was the top fund owner in Procter & Gamble last quarter with over 52 million shares (see Warren Buffett's newest picks).
Costco (NASDAQ: COST) was a 140% increase for Griffin last quarter and is now the fund's 8th largest 13F holding. The bulk-retailer is expected to grow revenues 7% in FY2013 on the back of 7% growth in same store sales and 5% growth in store square footage. Driving this defensive play is an expected membership fee increase and market share gains via its upscale product mix, which appeals to a more affluent customer base. Costco is also expanding into international markets, which should help drive its 13% long-term expected earnings growth rate. Costco also has a beta of only 0.7, and trades cheaply at 0.4x sales, below Wal-Mart (0.5x) and Target (0.6x). Mega-billionaire Bill Gates was Costco's top fund owner last quarter (check out Bill Gates' biggest bets).
ConAgra Foods (NYSE: CAG) is Griffin’s 21st largest 13F holding and recently announced plans to acquire Ralcorp Holdings. Although we believe this will be a long-term positive for future growth, there are a number of concerns related to the debt burden ConAgra will now bear. The Ralcorp deal is valued at $6.8 billion, but the debt load caused S&P to cut its credit rating to just one level above junk. S&P now has a triple B-minus rating on the company. Despite its debt concerns, ConAgra does pay a handsome 3.4% dividend yield.
Kellogg (NYSE: K) saw Griffin up his stake 4,000% last quarter. The company's Pringles acquisition is putting Kellogg on the map, so to speak, in terms of international exposure. We view Kellogg’s valuation as favorable, where it trades at only 15 times earnings, below Post (23x), Hain Celestial (24x) and Unilever (20x). When factoring the company's below-average expected EPS growth rate, though, we can see there are some concerns, as it sports a PEG above 2.0. Interestingly, Ray Dalio of Bridgewater Associates did make Kellogg one of his newest picks last quarter, which is a big endorsement.
Abbott Laboratories (NYSE: ABT) is one of our favorite drug stocks with solid growth prospects. Griffin had Abbott as one of his largest increases, with Citadel upping its shares owned by over 18,000% last quarter. Although its dividend is less than 1% - compared to Merck, Pfizer and others paying a 3%+ dividend – we are encouraged by its 9% long-term expected earnings growth. Starting in 2013, Abbott plans to spin off its research and development drug business in the form of a new publicly traded company. Abbott’s new R&D segment is expected to have generated upwards of $18 billion in 2012, where legacy Abbott sales is around $23 billion. The true benefit for each company will be higher multiples, as each can better focus on operations.
In short, Griffin has a number of bets in various industries that will perform well despite an uncertain economic backdrop. These include the consumer staples industries – products, food, and bulk retailers. One of Griffin’s other industry bets is pharma, where a rising population will allow Abbott’s legacy brand to perform well, while also offering investors a growth opportunity.
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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