ESL Investments Portfolio Update
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
ESL Investments is a $5.5 billion hedge fund started by Ed Lampert in 1988. According to Insider Monkey, he believes in concentrated value investing, which is basically aiming to buy assets for less than what they are worth and to sell them at or closer to what they are worth. Lampert makes concentrated bets and holds them for many years, similar to Warren Buffett. Lampert, who typically invests in undervalued stocks, is known to have modeled his investing style on Buffett's style by analyzing his annual shareholder letters. I stressed many times in my blog to study what top hedge fund holds in their portfolios. Let’s analyze ESL Investments current holdings:
Similar to Soros Fund Management, Viking Capital and Leon Cooperman’s Omega Advisors, ESL holds Capital One Financial (NYSE: COF), but reduced the existing position by 32% last quarter at an average price of $56. Why do managers like this stock ? Capital One retains some unique positives. The company is exposed to one of the highest margin businesses in the banking sector: credit cards (60% of its profits remain tied to credit cards). In addition, the company is one of the country’s largest auto lenders. As the Capital One’s two large opportunistic acquisitions this year are fully integrated and tangibly add to annual earnings power, the market could be bullish on COF potential. In fact, shares are currently undervalued and could be poised to rally as soon as Capital One starts delivering integrated results from these acquisitions. At today's price, the stock trades at just 0.85x P/BV and a forward P/E of just 7-8x. In addition, because the company has already strengthened its balance sheet in 2012; Capital One will be in a position to buy back shares or increase dividends by 2014. Considering that regional banks trade at an average multiple of 12x earnings, Capital One could reach $90 in the next two years. I think this is the bet that these value managers consider to this stock.
Ed Lampert initiated a position in Autozone (NYSE: AZO) last quarter. AutoZone delivered double-digit earnings growth, but overall sales increased just 3.5% year-over-year. The company is also experiencing an anemic same-store sales of 0.2%. Considering that the fleet car age is at record high (17 years), I think that consumers are likely to buy a new car rather than repair the existing one. Considering that housing is finally recovering, jobs are slowly coming back to the economy and the Big Three automakers increasing production; I am not bullish on automakers as consumers will rather purchase a new car, replacing the old one. I expect investors to gradually turn their attention to shares of retailers more skewed to an improving economic backdrop and stronger consumer environment.
The fund also initiated a position in Big Lots (NYSE: BIG). I think that Lampert bets that the stock is undervalued compared to its peers. The company trades at 8x forward P/E and a P/S of 0.3x in comparison to the industry average P/E of 16x and a P/S of 0.88x. Although the shares are down a good deal (-27% YTD), I only advise investing in BIG when I see some positive catalyst, such as Canadian operations doing better or same store sales rising in the U.S. I like the fact that the company repurchased 6% of its outstanding shares, spending $149 million under its $200 million share repurchase program. The cash and cash equivalents increased by $4 million to $62 million which is also a good signal. Big Lots has also a high free cash flow yield of 8%.
Lampert also initiated a position in Netflix (NASDAQ: NFLX). Carl Icahn also started a position (a huge one) in the stock last quarter. Carl Icahn and Lampert considered the stock undervalued given Netflix dominant market position, international growth prospects and its strategic value to larger companies according to press releases. While I agree with these statements, I think it may be more cost-effective for a company to build its own video streaming service than to buy Netflix at the current 5.5b market cap. Considering NFLX staggered board, recently announced poison pill and timing for the next shareholder meeting, Icahn's best possible strategy is a quick strategic sale of the company which will not be easy to achieve. I do not like the fact that Netflix added just 1.16 million domestic streaming subscribers and 1.22 million globally in the last quarter. This number was below previous guidance as was the company's revised guidance for annual growth. I think that Netflix does not have a competitive advantage in its domestic streaming business like it did in its DVD rental business. A very difficult company to both analyze and make projections.
martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of Big Lots and Netflix. Motley Fool newsletter services recommend Netflix. 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!