Billionaire Richard Chilton’s Favorite Retail Stocks

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Even with the data in 13F filings being several weeks old by the time they are released, there are still a few different ways for investors to use this information. One way is by researching potential investment strategies; we have discovered, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year on average (learn more about our small cap strategy). A second method is to use the names reported in 13F filings as a list of ideas and do more research on any stocks which seem like good values. We have gone through the 13F from billionaire Richard Chilton’s Chilton Investment Company, and here are the fund’s top five positions in retail stocks (representing a variety of verticals) as of the end of December (or see our full list of Chilton's stock picks):

The fund increased its holdings of Dollar General (NYSE: DG) by 64% in the fourth quarter of 2012 to a total of 2.8 million shares. Dollar stores had been big hits a couple years ago, but Dollar General is actually up only 8% in the last year. Sales were up 10% in its most recent fiscal quarter compared to the same period in the previous fiscal year, contributing to a 21% increase in earnings; given those growth rates, the trailing P/E of 17 is somewhat attractive. Billionaire Stephen Mandel’s Lone Pine Capital was also buying Dollar General in Q4, with the fund reporting a position of over 13 million shares in its own 13F.

Chilton owned 1.6 million shares of Home Depot (NYSE: HD) at the beginning of January. The home improvement retailer’s price is up 44% in the last year as market watchers expect an increase in housing transactions to stimulate store traffic. Indeed, Home Depot experienced double-digit growth rates of both revenue and earnings in the fiscal quarter ending in early February versus a year earlier. The stock trades at 23 times trailing earnings, meaning that the current price already includes some additional growth. Fisher Asset Management, managed by billionaire Ken Fisher, is another major holder of the stock.

$14 billion market cap auto parts retailer AutoZone (NYSE: AZO) was another of Chilton’s favorite retail stocks. Demand for replacement parts seems to be more or less independent of the broader economy, and so AutoZone’s beta is 0.2. While the earnings multiples are not particularly high, the business has been struggling recently with slight declines in sales and net income. Billionaire Andreas Halvorsen and his team at Viking Global initiated a position of over 580,000 shares last quarter.

Costco (NASDAQ: COST), another retailer with generally limited exposure to overall consumer demand, was another retail pick; Chilton added shares and closed December with over 560,000 shares in its portfolio. Warren Buffett also likes Costco, with Berkshire Hathaway having 4.3 million shares according to its own 13F (see Buffett's stock picks). In the fiscal quarter ending in November 2012, the first of Costco’s fiscal year, a combination of sales growth and higher margins drove earnings up 30% from its levels a year ago. Costco carries trailing and forward P/Es of 25 and 20, respectively.

Chilton increased its stake in Dollar Tree (NASDAQ: DLTR) by 39% between the beginning of October and the end of 2012. Home Depot turns out to be the lone bullish investment on this list, as Dollar Tree is of course another low beta retailer (specifically, the beta is 0.2). Dollar Tree has also been experiencing strong growth on both top and bottom lines, and as with Dollar General the market may be underestimating future prospects given that the earnings multiples are in the teens. Tiger Cub John Griffin’s Blue Ridge Capital was also buying Dollar Tree in Q4.

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 recommends Costco Wholesale and Home Depot. The Motley Fool owns shares of Costco Wholesale. 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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