4 Picks You Should Consider

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 Citadel’s latest 3Q holdings. Citadel uses a combination of advanced computer code, complicated financial algorithms, and secrecy when selecting its holdings.  As explained in one of my blog’s articles, I think it is important to evaluate what powerful institutional investors buy or sell in the recent quarter.

Citadel likes Procter & Gamble (NYSE: PG), which is a clear turnaround story. I feel encouraged that in the last reported quarter, PG reaffirmed FY 2013 guidance and announced strengthened productivity plans and higher share repurchase potential. In addition, P&G will reiterate the cost savings objectives it announced earlier this year, including $6 billion from cost of goods sold, $1 billion from marketing efficiencies, and $3 billion from core selling, general, and administrative (SG&A) overhead costs. In the last shareholder meeting, management was confident on achieving long term growth rates of high single digit to low double digit core EPS growth.

In addition, PG is focused on growth in developing markets. In the call, management highlighted that emerging markets 2020 population growth will be 800 million people with 1.5 billion in middle class incomes. I am optimistic that commodity prices will not go up materially in 2013. Shares are neutrally priced at 16x forward P/E. I think the stock is an attractive pick for a long term investor.

Citadel reduced 19% its position in Apple (NASDAQ: AAPL), but I think shares are still cheap. With $128 per share in cash, and 2013 expected earnings per share at $56, Apple trades at 2013 x7.3 P/E (after taking the cash out of the equation). But multiples are static and Apple is a continued growth story. Remember, 2011 EPS was $28.60, 2012 EPS is expected to close at $45.50, and its not difficult to think that Apple can grow iPhone units by 45%, tablet units by 60%, and Macs by 5%. I think that the market is pricing Apple as though it will never introduce any new products. Apple’s products remain the "gift of choice" this holiday season, and I think investors will anticipate good quarterly results coming in January. Hedge funds seems to buy at these levels because the stock does not keep going down when it trades between the range of $520 and $530.

The fund also holds Costco (NASDAQ: COST) and increased the position in the company by 150% last quarter. The company recently announced a special dividend of $7 per share, which shows that it is operated by a shareholder-oriented management team. I believe that Costco is well positioned to weather the sluggish recovery in the economy given its focus on low prices.

In a recent report, Stiefel Nicolaus explained that Costco should see benefits in FY 2013 of its renovated website, higher membership fees boosting cash flow, plus ramping international (high member signups) growth next year. Costco now trades at 10x EV/EBITDA, which is a 35% premium to its peers (in line with its historical average relative valuation). Bank of America has a price target of $110 and is also bullish on this company.

Lastly, Citadel started a position in Capital One Financial (NYSE: COF). This is a well capitalized company, reporting a Tier 1 capital ratio of 12.7%, a Tier 1 common ratio of 10.0%, and a leverage ratio of 9.9%, well above the regulatory requirements. One of Capital One’s core strengths comes from its credit card businesses. In that segment, total customer deposits increased 65% year over year in the first 9 months of 2012, driven by the added deposits from ING and increased marketing efforts. This segment continues to deliver strong results on a risk adjusted basis. In the last earnings report, the company showed strong underlying trends with resilient revenue yields, falling funding costs, and historically low credit losses. I believe this is a solid pick given the improvement in the overall lending activity across the US and the improvement in the US housing sector, which accounts for 40% of the company's balance sheets.

martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Costco Wholesale. Motley Fool newsletter services recommend Apple, Costco Wholesale, and The Procter & Gamble Company. 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!

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