5 Picks From Bain Capital’s Public Equity Fund

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Apple (NASDAQ: AAPL) is Brookside Capital's top stock pick. The tech stock makes up over 7.8% of the fund's 13F portfolio, according to its last quarterly filing with the SEC. Brookside - Bain Capital’s public equity fund - focuses on long/short positions and uses fundamental analysis to invest across all economic sectors (see Brookside Capital's favorite stock picks here).

After eclipsing the $700-mark in September 2012, Apple tumbled to around $530 by the end of last year, but still managed to close the calendar up almost 30%. It's been said on literally every channel out there, and repeatedly at that, but we'll say it again: the stock is an excellent value opportunity. Apple trades at 12x earnings, where other major tech peer Google is at 23x and Microsoft is at 15x.

From a growth standpoint, Apple's 5-year long-term EPS growth rate also outshines that of Google (13%) and Microsoft (9%), and what's the cherry on top? Investors are severely discounting Apple's future growth prospects, as shares of the tech giant trade at a paltry PEG ratio of 0.6; typically any figure below 1.0 signals an undervaluation.

With close to $120 billion invested in its secret hedge fund (learn more about Apple’s secret hedge fund), it's quite possible that income-seeking investors could see a boost in payout over the next year or so. For those keeping score, Apple's projected dividend yield (1.96%) still remains above that of the 10-Year Treasury (1.93%). Think about that for a second, and then think about this: Apple has a bevy of growth drivers that can boost its shares to a fairer valuation, and they're almost all product-related.

Some analysts estimate that an Apple TV would add at least 5-10% of upside to this year's EPS estimates if Cupertino does release the device, and obviously, a low-cost iPhone would do wonders for the company's exposure in emerging markets. Most of the recent hype has been about Apple's presence in the smart watch arena, but keep your eye on both of these potential developments. Billionaire David Einhorn of Greenlight Capital is one of the key investors owning Apple at the moment (check out David Einhorn's top picks), and AAPL was also the No. 1 pick among the 400+ hedge funds we track last quarter.

What about the rest of Brookside Capital's top five 13F holdings?

EMC Corporation (NYSE: EMC) develops infrastructure technologies for the IT industry. Demand for data storage should help prop up the company, but cloud computing and virtualization software should be longer-term growth drivers. EMC continues to be a majority owner of VMware, and the two make a good team, as EMC is a leader in data storage and VMware is a leader in virtualization.

These initiatives should help drive the stock's 5-year expected EPS growth rate of 14% annually. In the interim, company-wide revenues should be up 7% in 2013 and revenues from VMware are expected to be up 17% over the period.

Dollar General (NYSE: DG) is one of the major discount retailers in the U.S. Shares trade at 16x earnings, alongside Family Dollar and Dollar Tree. The discount retailer's 3Q EPS results came in at $0.63 compared to $0.50 one year earlier, and this comes on the back of a 4% growth in same store sales. The retail store was added to the S&P 500 Index a few months ago and should perform well given its consumer staple mix, and base of low to mid-income customers.

Michael Kors Holdings (NYSE: KORS), the relatively new public company, is up over 100% since its late-2011 IPO. Kors has beaten earnings expectations each of the last four quarters by at least 20%, and has some of the best growth prospects in its industry. After this robust performance, the stock now trades at 40x earnings, well above peers like PVH (20x) and Ralph Lauren (22x). Despite its valuation, Kors' EBITDA margin (27%) is well above both its previously mentioned peers, and the sell-side expects its EPS to grow by 30% a year over the next half-decade. It's an interesting growth opportunity.

Last but certainly not least, Youku (NYSE: YOKU) is a provider of video content in China. With relatively little debt, Youku appears to be one of the best-positioned Chinese media companies. Compared to other major peers, Youku has the greatest long-term expected EPS growth rate at a 35% CAGR, compared to Sina (24%) and Sohu (11%). There are a number of hedge funds owning the stock, including Blue Ridge Capital, Legg Mason and SAC Capital. Billionaire Ken Griffin - founder of Citadel Investment Group - is also one of Youku's top-name investors.

In short, two extremely compelling investment opportunities of Brookside's include newly-public Michael Kors and Youku. We are also encouraged by Dollar General and its expansion efforts. It appears that Bain Capital and Brookside still love Apple, which they have been adding to their position since the third quarter of 2011.


This article is written by Marshall Hargrave and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Meena has a long position in AAPL. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and EMC Corp. 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!

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