Growth at Attractive Prices: Follow Blue Ridge Picks

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

In this article I analyze John Griffin’s Blue Ridge Capital. Mr. Griffin’s investment method is long/short, with a long bias. The long positions are usually in large cap and high performance stocks, while the shorts tend to be in lesser known entities with fundamental problems. The fund’s investment decisions are based on bottom-up in-depth research of the fundamentals to determine the long term perspectives of each individual company, with some consideration given to the general prevailing environment.

Gilead: Top Biotech Pick

Blue Ridge started a material position in Gilead Sciences (NASDAQ: GILD) in Q4 2011 and has increased that position every quarter. In fact the average cost of GILD is around $23 per share.

Gilead has a strong success with a one-a-day HIV pill and is poised to repeat that success with Sofosbuvir, a new treatment for hepatitis C that has a higher cure rate with less toxicity than Interferon, the normal treatment for these kind of desease.

I think that Gilead is going to be unrivaled in terms of EPS growth and earnings because the market for Hepatitis C in the US is huge at $10 billion, with 4 million people infected. Kris Jenner, manager of T.Rowe Price Health Sciences projects that GILD top line could grow at a CAGR of 17% through 2016 with EPS around 25% per year.

Gilead's operating and profitability metrics are outstanding:

  • Operating Margin of 45%: GILD's Operating margin (%) is ranked higher than 95% of the 173 Companies in the Biotechnology industry.
  • ROE of 41%: Higher than 95% of the companies in the Industry
  • EBITDA growth of 15%
  • 3 Year Annual EPS Growth of 14%

In terms of valuation, Gilead does not seem expensive: the stock is trading at a Forward P/E of 16x which is in the low end of its historical P/E band. The stock should trade at a P/E of 25x and a P/FCF of 25x which could translate into a price target of $65.

An emerging market bank jewel

Blue Ridge seems to be bullish on Banco Santander´s Mexican Division Banco Santander Mexico (NYSE: BSMX). The fund allocated 3.1% of its portfolio in this stock at an average cost of $15.

Santander Mexico has a strong 2.5% Return on Assets (compared to Industry Median 0.8%) and a trailing P/E of just 11x. The bank has been growing earnings at a 15% rate in the past 3 years combined with a strong balance sheet (Tier 1 Capital Ratio of 14%).

Santander is a massively well-capitalized bank operating in a nascent market for financial services. The private debt-to-GDP ratio is about 50% lower than it is in Brazil and many Mexicans still lack mortgages. The bank can still generate an average 12% EPS growth for the foreseeable future considering it is one of five banks that control ¾ of the market.

The bank is currently balancing robust growth with strong asset quality and operational efficiency. In the last reported quarter, Net interest income (NIM) expanded 13% year-on-year and net commissions and fees grew 34%. Performance in key business segments was strong in 2012, with year-on-year increases of 21% in consumer loans, 30% in credit cards, and 77% in loans to small and medium enterprises ("SMEs").

What I liked from BSMX is that the bank achieved growth while maintaining a strong focus on prudent risk management - reflected in controlled NPL ratios and a stable cost of risk.  Soros Fund Management seems to agree with Blue Ridge: both initiated positions at this leading emerging bank franchise.

The retail stock that hedge funds are buying

Blue Ridge and other prominent fundamental agreed on one US retail pick: Dollar Tree (NASDAQ: DLTR). Managers Steve Mandel, John Keeley, Ray Dalio, Joel Greenblatt and Julian Robertson, among others bought DLTR last quarter at an average price of $41.

I think that the company’s Q3 results show that the concept of dollar stores still generates outstanding growth: sales increased 7.8% to $1.72 billion, driven principally by increases in traffic and earnings increased 18.6%. Operating margin increased by 40 basis points to 10.7%, the highest this quarter operating margin in the history of Dollar Tree.

Over the next several years, it’s likely that consumers demand for value will continue to grow and intensify and  Dollar Tree is uniquely positioned to take advantage of this trend. The company just entered to the huge Canadian market (Canadian market can support up to a 1,000 Dollar Tree stores according to management estimations). In addition, the company can potentially grow to 7,000 stores in the United States, plus additional growth in the recently introduced Deal$ format.

The stock is cheap at 16.7x earnings considering it is trading in the low end of its valuation range (DLTR traded between 17.5x and 25x from 2008 to 2012).Dollar Tree has delivered impressive earnings over the past 10 years, with EPS numbers increasing every year over the past 10 years. EPS had grown at 16.46% annually over the past 9 years and 26.72% annually over the past 5 years, which is outstanding in the low growth environment of the current US economic scenario. Dollar Tree is a great stock for the long term oriented investor at current prices.

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