What Does Billionaire Dan Loeb See in This Jeweler?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Several weeks after the end of each quarter, hedge funds and other major investors file 13Fs with the SEC, which are then disclosed to the general public. We track these filings, using the included information to develop investing strategies; for example, we’ve found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy).

Of course, we also like to review filings from top managers such as billionaire Dan Loeb of Third Point to see what trades they were making. When we looked at Third Point’s most recent 13F (see the full list of Loeb's stock picks), we noticed that the fund initiated a position of 2.7 million shares in Tiffany (NYSE: TIF) between January and March. This made Third Point the largest shareholder of Tiffany out of the filers we track.

The $10 billion market cap jeweler and jewelry retailer grew its revenue 9% in its most recent quarter (which ended in April, and was the first of Tiffany’s fiscal year) compared to the same period in the previous fiscal year. Comparable store sales were up moderately with some growth coming from an increased number of locations. However, with costs rising as well, earnings per share were only up by a penny to $0.65. Sales growth occurred in all four major geographies, with the highest growth rate (of 15%) occurring in Asia-Pacific (a segment which excludes the much slower-growing Japan). Growth rates were also high in the Middle East, though that is still only a small source of business for Tiffany.

Its current market capitalization places Tiffany at 23 times trailing earnings, which seems aggressive considering how low net income growth was last quarter. Analyst growth expectations imply a forward P/E of 19, suggesting that investors are quite optimistic about the company’s prospects over the long-term. We’d note that as a provider of jewelry, Tiffany tends to be dependent on the prosperity of the overall economy as shown by its beta of 1.90. Chilton Investment Company, managed by billionaire Richard Chilton, reported ownership of about 730,000 shares in its own 13F (find Chilton's favorite stocks).

The closest peers for Tiffany are Signet Jewelers (NYSE: SIG) and Zale (NYSE: ZLC). Zale has risen over 250% in the last year, as the company has broken into the black. Its market capitalization is only about $300 million, but with a current price of over $9 and close to 700,000 shares traded per day, there should be sufficient dollar volume. It trades at 23 times forward earnings estimates. Signet is somewhat closer to value territory than either Zale or Tiffany, with trailing and forward P/Es of 15 and 13, respectively. With double-digit percentage increases on both top and bottom lines last quarter compared to a year ago, we think it is worth a closer look from investors.

We can also compare Tiffany to online jewelry retailer Blue Nile (NASDAQ: NILE) and upscale accessories provider Coach (NYSE: COH). Blue Nile has been reporting excellent numbers, but remains a popular short target (the most recent data shows 26% of the float held short). With a forward earnings multiple of 36, we certainly see why many market players are bearish and despite recent growth, we don’t think it is a buy right now. Coach is valued at 16 times its trailing earnings, and it has been delivering modest growth rates going by its most recent 10-Q; that company might also be worth looking at on a value basis. Coach, as it happens, has fallen in price over the last year against a rising market.

Tiffany seems to be priced with the expectation that the company’s earnings will rise sharply going forward, and with recent performance not really bearing that out, we think that Loeb and his team are taking a risk here. Even if the jewelry industry picks up strongly, we think that Signet’s discount to Tiffany -- not to mention the fact that that company’s business seems to be doing a bit better in any case -- would make it a more attractive target for investors. 

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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 Blue Nile and Coach. The Motley Fool owns shares of Coach. 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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