Brave Warrior Investing: Are you Ready ?

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

I like to track prominent hedge fund holdings. Individual investors should study what top fundamental investors have been doing with their portfolios. These kind of hedge funds invest considerable time and resources analyzing stocks. I focus on institutional investors that hold concentrated positions and have a long-term, fundamental bias. In this article I analyze Glenn Greenberg’s Brave Warrior Capital holdings. Greenberg invests in companies with little competition, and places a great deal of emphasis on Return On Invested Capital (ROIC). The fund has a portfolio value of $1.6 billion and its 10 top holdings equal 90% of the whole portfolio, an evidence of Brave Warrior’s focus on position concentration. Let’s see what Brave Warrior likes:

Great Tech Giants

Brave Warrior is bullish on both Google (NASDAQ: GOOG) and Oracle (NYSE: ORCL). Both stocks represent 20% of the fund´s portfolio.

Greenberg likes Google since Q1 2010 when he started a position of 134k shares. Currently the fund holds 279k shares at an average cost of $471. There is no doubt that Google is one of the best stocks in the whole tech/media sector:

  • Operating margin of 25.4% compared to the Industry Median of 4.5%
  • Net margin of 21.4% compared to the Industry Median of 2.95%
  • ROE of 15% with no debt
  • ROC of 110.4%: outstanding (metric that Greenberg seems to look for very carefuly)
  • Average Revenue Growth of 20% compared to Industry Median of 8%
  • EPS Growth of 12.3%
  • Operating Cash Flow converts almost everything to Free Cash Flow

In terms of valuation, the stock sells at a current P/E of 24x, far away from the 30/40x earnings multiple GOOG traded from 2008 to 2010. The stock trades at a P/S of 5x which is one of the lowest sales multiples that Google has traded since it becomes public. For example, Google traded at 9x sales in 2008, 7x sales in 2009 and 6.5x sales in 2010. After that year Google sales multiple derated and went to a low of 4x. It seems that after 2010 the market lowered Google´s growth expectations but those re-rated again in the middle of 2012. I bet that trend to continue.

I think there are two emerging positives that are starting to shift sentiment from the "mobile is a liability for Google" camp that have weighed on shares until the middle of 2012, to the "Google could be the best positioned online advertising company for mobile" group, including: 1) the Enhanced Campaigns Adwords system overhaul and potential mobile revenue increase, and 2) Mobile search is getting more profitable for Google, any way you slice the numbers. FB saw its market cap increase by 50% in fall 2012 when sentiment shifted from the mobile negative-to-positive camp, hence I continue to see upside to Google shares as these trends become more clear.

Oracle is another stock that Greenberg is very bullish on. Brave Warrior started buying ORCL in Q4 2011 at an average price of $30 but materially increased its position when ORCL started trading between $27-29. The fund's average cost is $29 a share and represent 8.6% of the equity book.

Despite an uncertain macro scenario, Oracle is performing very well: new software sales increased 17% on broad-based strength across geographies (Americas +22%), APAC (+13%) and EMEA (+10%), with applications, middleware and database all growing double digits. Cloud software revenue of $230 million was up from $222 million q/q, though below expectations. New hardware systems revenue remains difficult, declining 25% y/y, as growth in Engineered Systems is still not enough to compensate for declines in legacy Sun business. However, business remains on track to post y/y growth by the end of FY13.

The US bank that Brave Warrior likes

Brave Warrior surely likes US Bancorp (NYSE: USB) simplicity: the bank makes money in the ¨good, old fashioned way¨ by collecting deposits, issuing loans and wealth management.

Despite the current environment is not the best for US banks (low interest rates compress bank profits), USB has a sizable payment-processing business that helps retailers handle electronics transactions. This business is a strong moat for USB as it does not require capital expenditures to keep it growing. Remember the introduction of this article: Glenn Greenberg likes companies with high ROIC. In other words, companies that does not need significant amounts of capital to keep business alive.

USB trades at a P/E of just 11.5x and has the best operating margin, net margin, ROE and ROA in the whole banking industry. Top fundamental investors Warren Buffett, Lou Simpson, Donald Yacktman and Ray Dalio also invested in this top bank.

I think we are far from a material change in the Interest Rates scenario but it may be a good time to start building a position in a bank that could double as soon as the market starts projecting a coming change in the Fed's rate strategy

A triple buy: Brave Warrior + Insiders + Material Buyback

VistaPrint (NASDAQ: VPRT) is the fund´s third biggest holding: this position represents 9.7% of Brave Warrior´s portfolio.

The fund is extremely bullish on VPRT prospects in comparison to the current valuation. Greenberg started buying VistaPrint in Q4 2011 at an average price of $32 and increased that initial position of 2M shares every single quarter. The fund currently holds almost 5M shares at an average cost of $34 a share.

In the last report Vistaprint beat on both top and bottom line. The company reported EPS of $1.02 vs $0.75 Capital IQ Consensus Estimate and revenues of $348.3 million vs $341.70 million Capital IQ Consensus Estimate.

What is remarkable about VPRT is the rate of buybacks and the persistent insider trades at the same prices that Brave Warrior bought the stock. Since 2011, VistaPrint insiders have bought the stock almost every quarter and the company also started a material share buyback.

laurapaur2013 has no position in any stocks mentioned. The Motley Fool recommends Google and Vistaprint. The Motley Fool owns shares of Google 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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