Cantillon Capital Management’s Top Picks for Q3

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

In mid July, Cantillon Capital Management filed its 13F for the second quarter. These filings disclose many of a fund’s long equity positions in U.S. stocks as of the end of the quarter (so this one covers Cantillon’s holdings from the end of June) and we believe that they can be useful sources of information for investors.

For one, we’ve found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year, and we think that more strategies are possible as well. We can also go through individual filings in search of intriguing investment ideas, which can be researched further. Read on for our quick take on Cantillon’s five largest positions from the beginning of this month, see the full filing on the SEC's website, or compare these picks to those in previous filings.

Number one

There was little change in Cantillon’s holdings of Google (NASDAQ: GOOG) during Q2, as the fund closed June with about 410,000 shares in its portfolio. Google is valued at 17 times forward earnings estimates, as Wall Street analysts expect the company to continue growing its earnings as the Motorola Mobility acquisition continues to be integrated and the advertising operations continue to be a star business.

Google did grow its net income 16% in its last quarterly report compared to the second quarter of 2012, and we’d be interested in looking at it as a potential growth stock.

The best of the rest

Cantillon reported owning 6.7 million shares of Analog Devices (NASDAQ: ADI) at the end of the quarter. Recent reports have shown little change in the company’s financials relative to a year ago, yet markets like the $15 billion market cap semiconductor company enough that they have bid up its valuation to trailing and forward P/Es of 23 and 19, respectively.

While that is a bit pricey, we’d note that Analog Devices does have a sizable cash hoard with over $4 billion in cash on its balance sheet, and a current dividend yield of almost 3%.

Coca-Cola (NYSE: KO) remained one of Cantillon’s top picks between April and June with 7.2 million shares. Investors hungry for defensive stocks -- Coca-Cola’s beta is 0.3, and while the 2.7% dividend yield is not particularly high, it’s at least somewhat interesting -- like the soda company, and as a result, it trades at 21 times its trailing earnings.

However, net income has been down and so we don’t think that Coca-Cola is good value at this time; in addition, we’d imagine that investors looking for a low-beta stock could find one with a higher yield.

The fund reduced its holdings of Priceline.com (NASDAQ: PCLN), but the online travel company remained one of its largest positions by market value. Priceline continues to grow strongly, with revenue up 26% in the first quarter of 2013 versus a year earlier and net margins actually improving to the point where earnings were up 34%. The market price has already incorporated a good deal of future earnings growth into the valuation, with a trailing P/E of 32, and surely, growth has to slow sometime, but we’d still want to take a closer look at the company.

According to the 13F, Cantillon increased its stake in Baidu (NASDAQ: BIDU) to a total of about 2.4 million shares. Revenue growth has been quite high at Baidu, and while margins have been shrinking, the company still experienced 9% profit growth in its most recent quarterly report compared to the same period in the previous year. With the stock falling 12% in the last year, the trailing P/E is now 20. We’d have to check on the reasons behind the weaker margins but at that valuation, Baidu could also be a potential growth play.

Final thoughts

Clearly, Cantillon has a bit of a favored interest in tech-focused companies. Google, its largest equity holding, is on a roll in 2013 and is making its way ever-closer to that vaunted $1,000 mark, while Chinese search giant Baidu offers solid growth at a reasonable price.

Priceline is the most exciting play in the online travel space, and Analog Devices has been a respectable semiconductor stock year-to-date. Coca-Cola is the only exception, but if you’re going to go non-tech, why not go with the world’s biggest soft drink company? 

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Google. The Motley Fool recommends Baidu, Coca-Cola, Google, and Priceline.com. The Motley Fool owns shares of Baidu, Google, and Priceline.com. 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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