Eminence Capital ¨Quality Value¨ Holdings

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Eminence’s investment philosophy is oriented around finding companies that meets “quality value” requirements. According to HedgeFundLetters.com, Eminence Capital actively searches for discounts that are created by: (1) A good business in an industry shunned by analysts for any reason, (2) A good company that has “tripped” by delivering disappointing short-term earnings or through other catalysts that have not impaired the company’s long-term value, and (3) A good company that is not in plain-sight or analysts’ radars for various reasons ranging from being overshadowed by more prominent lines of business to undergoing a special situation such as a spin-off. I stressed many times in my blog to study what top hedge fund holds in their portfolios. Let’s analyze Eminence's current holdings:

Technology Picks

The fund seems to like companies that do not operate capital intensive models in the whole technology sector. The fund holds Google, eBay and Adobe as its top technology holdings.

Let’s focus on eBay (NASDAQ: EBAY). Both eBay and PayPal reported a surge in mobile volumes during the recent peak days of holiday shopping. The company reported a good Q3 showing EPS $0.01 better than consensus estimates while growing revenues 14.8% year/year to $3.4 billion vs the $3.4 billion consensus expected. PayPal delivered a strong Q3 performance, ending the quarter with 117.4 million active registered accounts, a 14% increase over the third quarter of 2011. Marketplaces delivered another strong quarter with accelerating user growth. Gross merchandise volume (GMV), excluding vehicles, increased 11% year over year to $16 billion in the third quarter of 2012. The company has a 5 year expected growth rate of 15% while its forward P/E is 17x which shows that valuation is not stretched from eBay’s future growth.

I like eBay’s entry into the retail segment. eBay reached an agreement with Discover Networks, which has agreed to accept Paypal Cards on Discover machines covering more than seven million retail outlets across the U.S. Once eBay issues PayPal cards to its 50 million odd active users in the U.S., its payment services would assume the characteristics of typical payment processors like Visa or Mastercard. Also, while online payments are increasing by the day, the offline retail segment remains huge for PayPal.

The fund also holds Adobe Systems (NASDAQ: ADBE). Adobe is transitioning its business model to convert into a subscription-revenue model. It is early to evaluate Adobe’s transition. The company trades at a forward P/E of 16x while its expected growth rate is less than 10%. It is not the same as eBay, which trades at a forward P/E that is quite similar to its expected growth rate. In the recent earnings report, management delivered reduced guidance. In fact, management has reduced guidance in the last two consecutive quarters driven by tepid end-market demand. FBR Research believes that the Creative Suite franchise will be a market share loser and no longer able to drive Adobe's business as it has in the past. FBR does not see any potential catalyst to offset this trend.  I think this trend could be exacerbated by the company's decision to transition to a pure subscription model, which will take years.

Focus on financials

The fund holds both JPMorgan and AIG as its top financial core positions.

It is remarkable that AIG (NYSE: AIG) has paid back its debt to the U.S. government, and is poised to grow faster than the industry as it works to lower its high combined ratio. AIG also appears cheap considering its price/ sales ratio is 0.7x, compared to an industry average multiple of 0.8x, and AIG's price/book ratio is just 0.5x, versus an industry average of 0.9x.  In the near term, AIG's continued portfolio optimization should free up additional capital that can be returned to shareholders. I think Eminence bets that longer term, the company's operational turnaround will deliver strong gains.

Retailers: Fossil or Ralph Lauren?

The fund selected two US retailers: Fossil and Williams Sonoma.

I like Fossil's (NASDAQ: FOSL) brand portfolio, which has many recognized brand names such as Adidas, Armani Exchange, Burberry, Diesel, Dkny, Emporio Armani, Marc By Marc Jacobs, Michele, Michael Kors, Relic and Zodiac. The company has the brands, knowledge and management to stay ahead of the emerging lifestyle and fashion trends to bring its customers innovative and unique products. The company has extended its product categories of existing brands with the introduction of jewelry collections and is continually innovating into new categories.

I also like Fossil's international diversification. Its products are distributed in Africa, Asia, Australia, Europe, Central and South America, Canada, the Caribbean, Mexico, and the Middle East. Fossil has a strong ROE of 29% and ROA of 17% which shows strong execution from its management team. Analysts expect 17% growth for the next 5 years while the stock trades at a forward P/E of just 14x. The company delivers 35% of its revenues from Europe which could create increased volatility in its earnings.

While Fossil is an interesting pick, I prefer Ralph Lauren (NYSE: RL), a retailer in which Blue Ridge Capital has placed strong conviction. I feel confident about the company’ s strategy to capitalize on the opportunities in emerging markets along with its focus on core business activities to boost the top and bottom lines. The company trades at a reasonable 17x forward P/E and just 2x P/S.

martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of American International Group and Fossil and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend Adobe Systems, American International Group, eBay, and Fossil. 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!

blog comments powered by Disqus