A Combination of Growth and Value

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

I think it is important to consider stocks that prominent value investors recently added to their portfolios. I like to follow great stocks that top hedge funds bought in recent quarters and buy/sell them at proper technical entry points. I explained in one of the blog posts in Warren Trades that top value managers have more resources and information than any individual investor to analyze companies. In general they do not buy stocks for day trading or short term trading. Hedge funds with billions under management are long term oriented so tracking their picks is one important step when analyzing stocks. In this article I will detail recent picks from 4 top value investors.

Long term growth in China? look at Nike

Nike (NYSE: NKE) is one of the top clothing brands in the world. The stock is an ideal play for long term oriented investors as Nike will keep growing its top leadership position in China and expects to deliver 8% annual EPS growth for the next 5 years. In fact, in the last quarterly report, Nike delivered 15% revenue growth, fueled by double-digit growth in the NIKE Brand and Converse. That's incredible growth in any environment and even more remarkable given the volatile global economy. Nike management remarked that China is moving toward a more consumer-focused economy and over the long term, I think this trend is good for the company. As more Chinese consumers have significant disposable income and demand for more premium products and presentation, global brands like NIKE, who are delivering on those demands, are winning.

Nike is also a company that has a shareholder oriented management. In fact Nike just announced a buyback program to purchase $8 billion of Class B common stock in four years. This is significative considering that NKE's current market cap is $43.7 billion. This shows management's confidence in the growth potential for Nike, both for cash and earnings. Nike has also a very strong balance sheet with $3.3 billion of cash at quarter end with less than $400 million of debt. The company’s trailing 4-quarter return on invested capital is 21.3% and its return on equity is 22%. Both metrics show that the business is strong.

Despite the thesis for long term investing, Nike lacks of catalyst for short term outperformance.  In the last report, Nike showed global future orders that came short of expectations (+8% in constant currency and sequentially decelerating from +12% in 4Q12, the lowest since 3Q10). Continued headwinds in China ( future orders came -6% constant currency vs. analyst estimates for +3%) and Europe overshadowed the domestic trends, while gross margin pressures continue. I will enter as soon as I see stabilization in China´s future orders and clear evidence that the Chinese economy has bottomed. Top value managers Mario Gabelli, Frank Sands, Lee Ainslie, Ken Fisher and John Hussman invested in Nike in the recent quarter.

Bank of America's fundamentals are slowly improving

Bank of America (NYSE: BAC) is another stock that attracted institutional interest in recent quarters. Prominent value managers David Tepper, John Burbank, Leon Cooperman, Bill Nygren and Ken Heebner bought the stock in the past months. Remember all these managers are long term oriented and they do not invest for short term reasons. I find several reasons to think that BAC could be a compelling long term investment. First of all, its balance sheet is considerably improving. Its Tier 1 common capital ratio under Basel 3 on a fully phased-in basis was estimated at 8.97% as of September 30, up from 7.95% at June 30. Tangible book value per share also increased to $13.48 at September 30, compared to $13.22 at both June 30 and September 30.

The Financial Stability Board gave a vote of confidence to BAC balance sheet in it's latest SIFI outlook. In the updated capital controls BAC was taken out of the 2.5% area (Meaning it would need an additional 2.5% of capital due to its size and impact on global markets) and moved into the 1.5% level. This meant that it would need to have a Basel III capital level of 8.5%.

Second, BAC credit quality trends are showing further signs of improvement. With the gradual recovery of the economy, credit quality continued to improve during the quarter with net charge-offs declining across almost all major portfolios from the prior-year quarter. Provision for credit losses decreased 48% year over year to $1.8 billion. As of September 30, nonperforming loans, leases and the foreclosed properties ratio was 2.77%, down 38 basis points (bps) from the prior-year period. The Net charge-off ratio decreased 31 bps year over year to 1.86%. I think that BAC could trade at $11 in the next 3 months reflecting a 0.8x forward tangible book value and 9.5 x 2013 EPS. I see opportunities to improve capital and book value through optimizing the balance sheet. Streamlining of businesses could lead to further strategic dispositions and asset run-off.

The "new" China internet big story ?

Qihoo-360 (NYSE: QIHU) is a very interesting growth opportunity but it is more oriented to a short term holder or trader. Why do I think this? it is almost impossible to predict the company's future earnings or growth and create a reasonable valuation model for this company. QIHU shows impressive growth metrics. For example, its last reported quarterly EPS grew 54% y/y and revenues 107%. The company grew annual earnings by 355% in the past 3 years and management is aligned with shareholders interest by owning 54% of company shares.  

The most important catalyst is Qihoo's entry into the PC-based search market with its Qihoo's 360 Comprehensive Search engine. According to Maxim Group, QIHU's search strategy may be able to secure ~10% of total search traffic in China. In 2Q12, the search engines of Baidu (NASDAQ: BIDU), Google (NASDAQ: GOOG) and Sogou accounted for 79%, 16% and 3%, respectively, of China's search dollar market. According to QIHU's management, Qihoo contributed to roughly half of Google's search traffic. Maxim assumes that more than 20% of Baidu’s search queries may have come from Qihoo given that more than 16% of the search queries from Qihoo's browser and web directory were historically distributed to Google. Qihoo management expects to capture 15-20% of the China search engine market in the medium term and they will provide details related to search engine monetization by year-end. Hedge fund managers John Burbank and Ron Baron invested in QIHU at an average price of $21.

A technology leader in a secular trend

Commvault Systems (NASDAQ: CVLT) is the world’s only fully integrated data and information management software platform leading the market in providing big data next-generation solutions. The Commvault platform enables customers to holistically and effectively implement comprehensive automated global data and information management solutions. The benefits customers derive from deploying Commvault's platform include; lower cost, high reliability, better support, better ability to recover data and lower business compliance and regulatory risk.

The major catalyst for Commvault increased growth of very large enterprise deals is the need for comprehensive next-generation shared services solutions by commercial government and MSP enterprises. Similar to Qihoo, CVLT reports impressive growth metrics. Its last reported annual EPS grew 58% and the company has a record of 27% 3 year EPS average growth. The company has recently announced a $50 million increase to the existing stock repurchase program and extended the expiration of the stock repurchase program to March 31, 2014. CommVault has repurchased $117.2 million of common stock (5.74 million shares). With the additional $50.0 million authorized by the Board of Directors, there is $102.8 million remaining in the repurchase program. I like to invest in companies that buy back its own shares.

Commvalut is a pure play on the Big Data secular trend. The massive growth and complexity of data is breaking traditional processes and procedures. Big Data is overwhelming IT networks and storage infrastructures and increasing legal, compliance and regulatory business risks. As a result, there is a growing consensus among enterprise and governmental customers that the IT challenges must be solved globally and holistically by completely re engineering IT infrastructures and utilizing global shared services models across all IT environments. Commvault is the true leader in this trend and its growth will continue as the company is releasing new products, reporting a strong pipeline and future orders.

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martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Baidu, Google, and Nike. Motley Fool newsletter services recommend Baidu, Google, and Nike. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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