Top Hedge Fund Managers Bought These 3 Stocks

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

I am always looking for solid stocks that prominent Hedge Fund managers have been buying in the recent quarters. As explained in my blog Warren Trades, top managers have billions under management and better research structures than individual investors, so it is always important to track what they buy or sell even if they report those holdings with 45 days of delay from the end of the quarter. In this article I detail 3 solid companies with top institutional sponsorship and growth prospects.

Undervalued technology play


Cisco (NASDAQ: CSCO) is a leading technology play that is experiencing a turnaround in the U.S. This is one of its strongest geographies at the moment, with state and local government order growth rates accelerating from 7% in the third quarter to 17% in the fourth. In addition, the 29 largest enterprise accounts grew double-digits in the last quarter, following a double-digit decline in the third, taking the overall growth in enterprise from 1% to 4%. I also like that the company keeps buying back its own shares at an accelerated pace. Cisco repurchased 15 million shares of common stock under the stock repurchase program at an average price of $16.44, and it has a remaining authorized amount for stock repurchases under this program for a total of ~$5.6 billion, with no termination date.


The last earnings report provided several positives. First, gross margins were particularly strong, up 80 basis points quarter over quarter to 62.7%, from 61.9%, well above the 61.6% consensus. Second, operating margins climbed to 27.9%, above the high end of the company's internal guidance of 26.5%-27.5% range. The company keeps showing strong execution in a tough macro environment. I think shares are attractively valued at just 10x P/E, while I am still concerned about US Federal spending ahead of the fiscal cliff. This is a stock that will rise fast if the whole fiscal cliff problem abates. Top value manager Don Yacktman bought the stock last quarter.


Lone Pine invested in this stock, why ?

Top hedge fund Lone Pine initiated a position in Dunkin (NASDAQ: DNKN) in the recent quarter. Why?


First of all, the company is expanding considerably in the US. Dunkin added 78 net new units during the quarter, versus 57 last year in the same period. Year-to-date, Dunkin added 142 net new units, compared to 123 last year, and the company raised its annual guidance for net development for Dunkin U.S. to between 280 and 300 net new units from the previous range of 260 to 280 this year.

I expect that Dunkin will gain top line momentum on new unit growth in the US, particularly outside the company's Northeast US base. I think that Lone Pine invested in Dunkin because they think that the concept can more than double its US unit count in the long term if they keep expanding outside that US region. The company also reported a strong quarterly performance of 5% revenue growth, or 12.5% adjusted operating income growth, and delivered adjusted earnings per share of $0.37, which is a 32% increase over last year. I like the concept of Dunkin's asset-light, nearly 100% franchised business model.


The best department store ?

Lee Ainslie, from Maverick Capital, recently initiated a position in Macy's (NYSE: M). The stock announced a very good quarter. Not only was its top line performance continue strong, but Macy's was also able to significantly exceed consensus earnings expectations and beat last year's $0.32 per share by 12.5%. What I found very interesting from that report was that online sales (macys.com and bloomingdales.com combined) were up 40.4% in the third quarter and 36.8% year to date, compared with the same periods in 2011. Online sales positively affected the company's same-store sales by 2.2 percentage points in the third quarter and 1.8 percentage points in the year to date. This is a strong segment in Macy's that could drive further same store increases in the medium term. The company also grew its cash flow position very well, generating cash from operating activities less investing activities of $274 million in the past 3 combined quarters, which is $119 million higher than last year´s. Macy´s is one of the best managed US department stores and it is a solid play considering that the US economy will keep growing.



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