This Hedge Funds Combines 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.
In this article I analyze John Griffin’s Blue Ridge Capital. Mr. Griffin’s investment method is long/short, with a long bias. The long positions are usually in large cap and high performance stocks, while the shorts tend to be in lesser known entities with fundamental problems. The fund’s investment decisions are based on bottom-up in-depth research of the fundamentals to determine the long term perspectives of each individual company, with some consideration given to the general prevailing environment.
In my blog I detail why I consider it important to track hedge fund holdings. In the article I describe Blue Ridge's portfolio.
Technology: focus on big cap leaders
It seems that Blue Ridge likes to invest in high quality technology stocks that offer considerable projected growth. In fact, the fund’s top 4 positions, or 25% of its portfolio, are Apple (7%), Google (6.2%), Amazon (5.8%), and Priceline (5.39%).
Blue Ridge used the market strength to light its positions in Apple (selling 12%) and Amazon (16%), while leaving both Google and Priceline unchanged. Let´s review these stocks.
Google (NASDAQ: GOOG) is a very interesting pick from different perspectives. First of all, the stock is inexpensive, trading at just 14x forward P/E. The lowest analyst estimate is an EPS of $42 for 2013 (implying EPS growth of 10% y/y) and taking that estimation, the stock would have a very reasonable forward P/E of 16x. This is reasonable for a stock like Google, considering it has a 5 year average EPS growth of 22%. Google is the leader in online advertising, and I believe that the core global search market can sustain 12–13% compound annual volume growth over the next five years. In addition, Google is building a comprehensive mobile presence, placing it at the center of the mobile internet ecosystem.
Priceline (NASDAQ: PCLN) is a strong pick from Blue Ridge. As described in the blog, Priceline is a great play on the ‘global travel’ theme. As emerging market consumers grow richer, they are likely to travel more. World Bank data suggest that the beta of the growth in flights per capita to growth in income per capita is around 2x (i.e. if GDP per capita increases by 10%, flights per person should be expected to increase by 20%). Projections from the IMF and the UN suggest that GDP per capita in the emerging markets could increase by 5% per year over the next five years, suggesting an increase in flights per capita of around 10% per year.
Priceline is the leader in online travel, and the stock trades at a reasonable valuation of 17x 2013 consensus EPS. In the recent report, PCLN reported 25% y/y 3Q12 gross bookings growth, exceeding both consensus and guidance. Results were driven by international gross bookings growth of 30% as Europe stabilized and room-night growth improved in the back half of the quarter. Importantly, 4Q guidance came in well above expectations across on gross bookings and revenue, with likely accelerating international bookings growth.
Bullish on specific retail picks
Blue Ridge holds 7.5% of its portfolio in US retail stocks. In the recent quarter, the fund added to its existing position in both Ralph Lauren (NYSE: RL) and Dollar Tree (NASDAQ: DLTR).
I like RL. In a recent report, UBS believes that revenue growth can accelerate, driven by new categories (handbags, home, men's accessories) and brands (Denim & Supply) growth in the US. In addition, UBS is bullish on the recent categories and e-commerce introduced in Europe, plus the company’s accelerating China story. I feel confident about the company’ s strategy to capitalize on the opportunities in emerging markets along with focusing on core business activities to boost top and bottom lines. The company trades at a reasonable 17x forward P/E and just 2x P/S.
Dollar Tree went down almost 30% from its recent 52 week high. The company reported a strong 3Q, and Blue Ridge sees the recent downtrend is an opportunity to keep accumulating shares. Sales increased in both basic and variety categories. Comparable store sales were positive every month and the company saw sequential improvement from August through October. Operating margin increased significantly and the company delivered record third quarter earnings per share. In the call management expressed optimism on the performance of new stores, which have opened at historically higher levels of productivity. The stock trades at a reasonable 14x forward P/E.
In addition, Blue Ridge holds positions in AIG (the only pick from the whole financial sector) and several industrial companies, such as Thermo Fisher, Colfax, and Owens Corning.
I assume Blue Ridge did not trust the rally that the market experienced in 3Q because the fund did not initiate any new position during that period.
Except some small opportunistic purchases in Ralph Lauren, Dollar Tree, Colax and Owens Corning, the fund stayed on the sidelines during the whole market rally or sold a part of some of its core positions, including Apple, Liberty Global, Priceline, etc. This is a clear signal that hedge fund portfolio managers are quite skeptical when the market is overly optimistic and use that strength to sell some holdings.
Blue Ridge is a hedge fund that focuses on 3 main pilars when selecting a stock: solid long term growth, strong current fundamentals, and attractive valuation. I think any investor should consider that approach when investing for the long term.
martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Priceline.com. Motley Fool newsletter services recommend Google and Priceline.com. 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!