Undervalued Picks From Top Managers
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As explained in my blog Warren Trades, it is essential to keep tracking hedge fund positions every quarter. Why? Top hedge funds have more resources than individual investors to analyze fundamentals. These institutions have a team of analysts that spend the whole day calling companies, doing surveys, and reading every fundamental analysis they can find on each company. In other words, hedge funds in general have way more resources and information than the average individual investor. In this article I focus on 3 companies that prominent hedge fund managers bought in the recent quarter.
The stock to play the big data secular trend
I believe that investors will keep looking for exposure to growth opportunities in the internet sector, considering the current uncertain macro environment. Equinix (NASDAQ: EQIX) is a very interesting stock to play the secular trend of big data growth. Top manager John Griffin, founder of Maverick Capital, bought Equinix in the last quarter.
I like the fact that Equinix recently announced that its Board of Directors approved a plan to pursue conversion to a REIT for the year beginning Jan. 1, 2015. The anticipated benefits to shareholders include significant tax savings and increases in income distributable to shareholders. Management explained that this tax-efficient structure will deliver significant economic benefits and allow them to provide shareholders regular distributions from earnings.
Equinix is one of the best growth stories around as a result of data and network traffic growth. Since 2009, the company's revenues have grown by over 30%, which has also resulted in significant gross margin expansion rates. It is also one of those companies that have been able to boost their bottom line alongside growth in the top line. EQIX's earnings grew by 20% in 3Q 2012, and in the next five years, earnings are expected to grow by approximately 30%, which is well above the industry growth of 15%. I also think that shares are attractively priced at 13.1x 2012 EBITDA and 11.2x 2013 EBITDA.
A former leader in the online travel industry
Leon Cooperman's Omega Advisors recently initiated a position in Ctrip.com (NASDAQ: CTRP), a former leader in the online travel sector. Considering how the whole online travel industry is growing, Ctrip could be an interesting play to catch-up to the growth that its peers experienced. Goldman Sachs issued a buy recommendation on Oct. 31, explaining that the company is the leader in the high-end business travel. Ctrip also reported strong earnings. Revenues grew by 20% year-over-year, at the high-end of the company's guidance, and the company saw a strong volume growth of 40% in the hotel business. Management also explained its focus to keep enriching Ctrip product offerings in a full customer experience and enhance brand awareness for future growth.
It is essential to consider that China’s leisure travel market is still in an early stage. Beyond short-term pressures from pricing war (which Goldman analyst said it was stabilizing), I think Ctrip’s core competencies are product offerings, service quality, IT efficiency and its highly-qualified and dedicated team. At $17, Ctrip shares are certainly not expensive considering that the company has $200 million left for its share buyback program and has a strong cash position of $831 million. In addition, the company's investments in Home Inns and China Lodging Group, plus the book value of its office buildings, account for half its market capitalization.
Seth Klarman bought this technology stock
Oracle (NYSE: ORCL) is clearly focused on driving its growth in the cloud, which may reassure investors worried that Oracle was late in doing so. On a non-GAAP basis, new software licenses and cloud software subscriptions sales grew 11% in constant currency and operating margin increased to 44% in Q1. Oracle's new cloud business is also approaching a $1 billion annual run rate and will drive Oracle's growth for years to come. Cash flow metrics are strong, considering that operating cash flow increased to a record high of $5.7 billion.
Oracle is choosing to rely on its expensive engineered systems at the heart of its cloud. The company has a vast list of existing customers that will prefer to run their private clouds on the same Oracle infrastructure that the company runs its public cloud on. This similarity will make it easier to port applications between the two clouds. While it is early to judge the whole Oracle cloud strategy, I think the company will leverage its existing client list very well by cross-selling cloud products and using its own infrastructure.
Top value manager Seth Klarman invested in Oracle in the recent quarter. Oracle has a strong return on equity, reasonable valuation levels, good cash flow from operations, and expanding EPS. In addition shares appear reasonable valued at just 10x forward P/E, not taking into consideration that the stock has almost $7 in cash per share. I think the market is not pricing in the potential success of Oracle's cloud initiative.
martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of Ctrip.com International and Oracle. Motley Fool newsletter services recommend Ctrip.com International. 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!