4 Stocks From a Top Growth Hedge Fund
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I always like to analyze what hedge funds portfolio managers have been buying or selling in recent quarters. In fact, I have a list of hedge funds (which is shared here) that I track and one of them is Driehaus Capital. This is not a deep value hedge fund as Appaloosa or Baupost. Driehaus looks for aggressive growth equities and does not care so much about valuation. In fact, he explained: "The real word is not that precise. I'm convinced that there is no universal valuation method. In fact, in the short run, valuation is not the key factor." Let's review the hedge fund stock selections and see which growth stock Driehaus likes:
Driehaus likes Apple (top position), Baidu (second), Equinix (15th), and Taiwan Semiconductor (17th).
The fund has conviction that Baidu (NASDAQ: BIDU) will recover and increased 55% its existing position at an average price of $110. The stock seems cheap considering it has an estimated 5 year growth rate of 38% per year and its forward P/E is just 15x. This is a company that is still growing and is exposed to the biggest online market in the world. In the recent earnings report, the company reported strong earnings of $1.37 per share, $0.09 better than the Capital IQ Consensus Estimate of $1.28 while revenues rose 51.9% year/year. I highlight the fact that Baidu increased its online marketing revenues 49.6% year/year and its active customer base increased 28.3% year/year. Is this a company that deserves a 15x P/E ? I do not think so. While Qihoo's entry into the PC-based search market probably resulted in an initial market loss of ~7% for Baidu, I believe the paid search market in China has ample room to keep growing. Given that Baidu commands 80% of the search market in the country, and half of China's population still doesn't have Internet access, I do not see Baidu’s growth materially slowing.
I like Taiwan Semiconductor (NYSE: TSM). The company reported Q3 earnings growth of 68% in Q3 and 38% revenue growth. Among the other 16 chipmaker stocks trading above 12 a share, none enjoyed a quarter even close to that sharp growth according to IBD. The company is growing at these rates fueled by its mobile products and is a leader in mobile integrated circuits. The mobile semiconductor industry is transitioning to smaller and more efficient chips. Most high-end smartphones use 45-nanometer processors and the transition is to 28-nanometer chips, which Taiwan Semiconductor is one of the leading providers. The company expects 28-nanometer revenue will be more than 20% of wafer revenue in Q4, and more than 30% in 2013. The stock trades at a very reasonable 15x forward P/E. Maybe the market is underestimating TSM future growth.
Give me vitamins!
The fund has a position in GNC Holdings (NYSE: GNC), a company that is a leader in the vitamins/nutrition segment and its growth has not stopped. In fact, the company reported earnings of $0.61 per share, $0.03 better than the Capital IQ Consensus Estimate of $0.58 while revenues rose 15.5% year/year to $621.6 million vs the $618.16 million consensus. Management issued an upgraded guidance for FY13 and highlighted that revenue increased in each of the company's segments: retail by 15.5%, franchise by 19.7%, and manufacturing/wholesale by 9.5%. Same store sales increased 9.8% in domestic company-owned stores (including GNC.com sales), representing the Company's 29th consecutive quarter of positive same store sales growth. In domestic franchise locations, same store sales increased 14.3%. The stock is priced at just 13x forward P/E and a P/S of 1.39x which I think are cheap multiples for a stock that has both US and international exposure and will continue growing (analysts projects 22% EPS growth for the next 5 years).
A bet on Brazilian oil
Driehaus bought more shares of Petrobras (NYSE: PBR) last quarter. This company is Driehaus’s third top equity position. Brazil's state-controlled oil company failed to achieve the returns it had been aiming for and the stock went down from $30 to $19 in less than 1 year. Petrobras has many political problems, inefficient management and bigger than expected costs.
Due to its operational troubles, Petrobras has a negative 16.4% EPS growth. The company has poor operational ratios: ROE of 5.4% and ROA of 3.5% which explains how poor the company is managed. I prefer BP (NYSE: BP) as the company is better managed and trades at much lower valuation multiples than Petrobras.
martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu. Motley Fool newsletter services recommend Baidu and Petroleo Brasileiro S.A. (ADR). 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!