Is this a Buying Opportunity for 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.
One of the best ways to get stock ideas is by tracking hedge funds holdings. I focus on value oriented portfolio managers with research intensive investment methodologies and a long term focus. As explained in Warren Trades, I keep an eye on stocks that several managers recently bought or added to their portfolios, trying to understand the whole investment thesis they used to buy each stock. In this article I focus on 3 stocks that prominent portfolio managers recently acquired.
The first stock is American International Group (NYSE: AIG). Top managers David Tepper (Appaloosa), Daniel Loeb (Third Point), Soros Asset Management, Leon Cooperman (Omega Advisors), Andreas Halvorsen (Viking), and Richard Pzena (Pzena Investments), among others, invested in AIG at an average price of $32.50. These managers pay attention to solid companies trading at very cheap valuations that provide a reasonable margin of safety.
This could be the case of AIG, as the stock trades at a meaningful discount to its book value (0.52x P/BV). Book value per share increased to $61.49 vs. $56.07 last quarter and $53.85 in 1Q 2012. The bulk of the increase in book value was driven by the $8 billion of share repurchases at a meaningful discount to book value. Despite the fact that the stock is undervalued, I think it will keep trading inside the range of $35-30 considering that increased regulation by the Fed will result in subdued capital returns, as greater scrutiny on holding company liquidity, capital resources, and leverage will likely limit future share repurchases to some percentage of retained earnings vs. its prior ability of monetizing non-core assets and using proceeds for buybacks.
Credit Suisse has a new price target of $35 vs. $31 based on the recent government stake reduction in AIG. I think that risks associated with substantial buybacks and the government overhang have both largely been put behind the company after this quarter. I do not know if AIG will keep going up from the current levels, but I am sure that the stock has very limited downside considering its balance sheet strenght and current undervaluation.
The second stock is Oracle (NYSE: ORCL). Value investor guru Seth Klarman recently initiated a position in the stock at an average price of $27.50. Although Oracle reported EPS in line with consensus, revenue in the quarter fell slightly below consensus, primarily due to continued weakness in hardware product revenue, which declined 21% year over year. Nonetheless, Oracle’s engineered systems continued to grow at triple-digit rates, and software license revenue slightly exceeded consensus expectations.
Oracle’s software license results for Q1 and guidance for Q2 (which was slightly above consensus) is evidence that enterprises are focused on boosting revenue growth and improving productivity and are willing to spend on applications and infrastructure addressing these goals—particularly in CRM, HCM, and analytics. During the OpenWorld 2012 user conference in October, Oracle further articulated the company’s long-term vision for cloud computing and its strategy to deliver integrated hardware and software systems. I think the market is not discounting the fact that Oracle is in an enviable position to take market share in the coming quarters given that it will cross-sell its new Cloud computing offerings to its existing client base.
The company's free cash flow continues to be very strong and management projects earnings growth of 20% over the next few years, fueled by the software business. The stock is cheap at just 11x forward P/E.
The third stock is VeriSign (NASDAQ: VRSN), which was bought by Steve Mandel (Lone Pine), Julian Robertson (Tiger), Ray Dalio (Bridgewater), and John Griffin (Citadel). Despite the company reporting better than expected Q3 results (EPS of $0.50 vs. $0,49 and operating margins of 56.4% exceeding consensus expectations of 54.4%), shares went down 20% as the company announced that pricing terms of the .com registry agreement are now being reviewed by the Department of Commerce and Department of Justice. Management also indicated that the time frame of this review will likely extend beyond the expiration of the agreement on Nov. 30, 2012. In other words, the government is analyzing the fair price of a current .com domain registration to either keep it unchanged or lower it.
According to Credit Suisse, the average price per annual domain registration across selected registry operators currently equals approximately $6.54, and the current one for VeriSign is $8.50. If the .com registration price is lowered to $7.50 that will translate to a stock price of $35. The real risk here is the Department of Commerce potentially announcing that VeriSign’s registry services for .com are not being “offered at reasonable price, terms, and conditions.” I think that shares will keep trading sideways until the pricing review finally ends, which can conclude in VeriSign trading from $25 to $52 depending on the final .com pricing. While the company keeps growing, I do not like to be exposed to risks I can neither control nor analyze. So, keep watching this stock, but I recommend staying on sidelines until the pricing risk finally ends.
martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of American International Group and Oracle and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group. 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!