Brave Warrior Capital’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.

We track quarterly 13F filings from hundreds of hedge funds, including Glenn Greenberg’s Brave Warrior Capital, using the results to help us develop investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year).

The information from individual managers’ filings, even though it is a bit out of date by now (the most recent 13Fs disclose many of a fund’s long equity positions as of the end of March) can still serve as a list of free investment ideas that investors can study further if they find any interesting names. Here is our quick take on Brave Warrior’s five largest holdings from its most recent 13F (or see the full list of stocks the fund reported owning).

Two healthcare picks

Greenberg and his team reported a position of 6.6 million shares in Valeant Pharmaceuticals (NYSE: VRX) in the filing. The company’s stock price has risen over 90% in the last year, giving it a valuation of $28 billion. Thanks in part to acquisitions, Valeant has been experiencing large percentage increases in revenue and operating income, but during Q1 2013, its net losses roughly doubled versus a year earlier due to higher operating costs and interest expenses. We would recommend avoiding it at least until we can be more confident about its earnings performance.

Another healthcare stock in the fund’s portfolio was its close to 4 million shares of pharmacy benefit management services company Express Scripts (NASDAQ: ESRX). Following the settlement of its dispute with Walgreen, Express Scripts’ business has rebounded nicely and it currently trades at 13 times forward earnings estimates (with an annualization of the numbers from recent quarters placing the stock close to value territory as well).

We’re interested in pharmacy-related businesses as the population ages, potentially driving demand for benefit management services higher, and consider Express Scripts a potential value opportunity.

Three more stocks Greenberg liked

Vistaprint (NASDAQ: VPRT) was another of Brave Warrior’s top picks with the filing disclosing ownership of 5.7 million shares. The $1.7 billion market cap printed marketing materials company (for example, it produces business cards, envelopes, and calendars) saw its revenue rise 12% in its most recent quarterly report compared to the same period in the previous fiscal year with profitability improving as well.

However, market prices already account for a good deal of future growth with a trailing P/E of more than 50 and over 40% of the float is held short.

Greenberg had 5.4 million shares of Oracle (NYSE: ORCL) in his portfolio at the beginning of April. Oracle has been recording earnings growth in recent reports, though this has come almost entirely through higher margins as the top line performance has been sluggish; further improvements in net margins may not be sustainable.

However, the stock is arguably cheap with trailing and forward earnings multiples of 14 and 10, respectively, and so it does not need to improve its net income much. Billionaire Ken Fisher’s Fisher Asset Management had about 19 million shares of Oracle in its own portfolio (find Fisher's favorite stocks).

Brave Warrior rounded out its top five picks with 8.8 million shares of investment broker Charles Schwab (NYSE: SCHW). Charles Schwab, following a more than 75% gain over the last year, looks fairly expensive in earnings terms -- for example, it is valued at 26 times consensus earnings for 2014 (and analysts seem to be expecting considerable improvements in EPS to get to that point).

Net income grew 6% in the first quarter of 2013 versus a year earlier, and we are skeptical that is a high enough growth rate to justify the current valuation.

Conclusion

As we’ve mentioned, we aren’t fans of Valeant at its current price and would hold off on Vistaprint and Charles Schwab as well -- the former has had the markets set a very high bar, while the combination of decent performance but high multiples at the latter is unattractive. Oracle, on the other hand, has low expectations in the market and so even with its business being flat, it might be worth investigating; Express Scripts also has a good deal of potential given its industry.

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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 Express Scripts and Vistaprint. The Motley Fool owns shares of Express Scripts and Oracle.. 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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