Tiger Cub Philippe Laffont’s Top Stock Picks
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Philippe Laffont’s Coatue Management is one of our favorite hedge funds. Several weeks after the end of each fiscal quarter, hedge funds file 13Fs with the SEC to disclose many of their long equity positions from the end of that quarter. While this information is a bit old by the time it is released, we’ve actually found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about imitating small cap picks). We also like to use filings from well-known fund managers as sources of initial investment ideas, which can then be researched further if they reveal any interesting names. We have gone through the most recent 13F from Tiger Cub Philippe Laffont’s Coatue Management and here are our brief thoughts on the fund’s five largest holdings as of the end of March (or see the full list of Laffont's stock picks).
Coatue slightly increased the size of its position in Equinix (NASDAQ: EQIX) to a total of 4.4 million shares. Equinix, a $10 billion market cap data center services company, carries a premium valuation in the market at over 40 times forward earnings estimates. While recent results on the top line have been strong--revenue rose 17% last quarter compared to the first quarter of 2012--earnings were up only slightly, and so we’d be concerned about the valuation. The most recent data shows 18% of the float held short.
The fund reported owning nearly 12 million shares of Time Warner (NYSE: TWX). Large-cap media and entertainment stocks are currently trading at trailing earnings multiples in the high teens, and Time Warner is no exception with a P/E of 18. Net income grew 24% in its most recent quarter compared to the same period in the previous year, though revenue was about flat over the same time frame. We’d be interested in comparing the company to its peers such as Disney and News Corp, which are priced in a similar valuation range.
Laffont and his team moved heavily into CBS (NYSE: CBS). CBS is priced in the same range as the other media stocks we’ve discussed, with a trailing earnings multiple of 19, and there’s some upside potential if the company can successfully spin out its outdoor advertising (i.e. billboard) unit as a real estate investment trust. In addition to the general benefits of spinouts, REITs are more tax efficient potentially allowing significant creation of shareholder value. However, we’d note that the IRS has recently formed a working group to potentially develop a stricter definition of real estate.
Coatue increased its stake in Apple (NASDAQ: AAPL) by 88% between January and March, closing the quarter with 1.2 million shares in its portfolio. During the first quarter of the year, Apple regained its place as the most popular stock among hedge funds, which it had lost in late 2012 (find more of hedge funds' favorite stocks). Currently Apple is valued at only 11 times its trailing earnings, with a good deal of its market cap being in the form of cash. While net income has been declining, we would watch to see if the business can stabilize and make the stock a value play.
Liberty Global (NASDAQ: LBTYA), which recently merged with another of Laffont’s top picks, Virgin Media, also had a prime place in the 13F filing. Following a 65% rise in the stock price over the last year, analyst expectations for 2014 imply a forward P/E of 25; the sell-side expects considerable earnings growth over the next several years, and as a result the five-year PEG ratio is less than 1. There has been high short interest in Liberty Global, though this is a common component of a merger arbitrage strategy.
Still, we would avoid Liberty Global at least for now. Equinix also seems a bit pricy at least going by recent earnings performance. We’ve mentioned that Apple may be a bit uncertain at this time, but the cheapness of the stock in terms of trailing performance, as well as the large cash hoard, means that a good deal of bad news is already priced in. The media companies we’ve mentioned here, as well as their peers, are certainly not pure value plays but have been doing well recently and may be worth a closer look.
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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Apple. The Motley Fool recommends Apple and Equinix. The Motley Fool owns shares of Apple. 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!