Michael Dell's Top Stocks

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

Most people are unaware that billionaire Michael Dell, the founder of tech giant Dell, has a hedge fund that oversees some $550 million of his personal wealth. Michael Dell formed the MSD Capital hedge fund in 1998, and it's currently managed by Glenn Fuhrman and John Phelan. The fund remains heavily concentrated, with over 80% of its assets vested in its top four stocks (check out MSD's top stocks). 
 
Let's eat
 
Michael Dell's hedge fund is 29.5% invested in DineEquity (NYSE: DIN)DineEquity owns and operates both IHOP and Applebees restaurants. Since acquiring Applebees in 2007, DineEquity has re-franchised almost all of the Applebee's restaurant chain and used the proceeds to reduce overall debt. As far as the informal sit-down dining space goes, the market expects the industry to see low-single digit same-store sales growth in 2013.
 
The aforementioned re-franchising efforts have lead to lower revenue, but DineEquity has managed to grow net income and double its profit margin from 2011 to 2012. 
 
  2009 2010 2011 2012
Revenue $1.4B $1.3B $1.1B $850M
Net Income $29M -$4M $70M $122M
EPS $0.55 -$1.74 $3.89 $6.63
Shares 17M 17M 18M 19M
Profit Margin 2.0% (0.3%) 6.5% 14.4%

Another big advantage is debt reduction to the tune of $332 million in 2012. The stock now pays a 4.1% dividend yield.

The company reported mixed results for the first quarter, with cost controls helping to make up for soft same-store sales. Analyst Will Slabaugh of Stephens Inc. noted that the "uneven" economy was a cause for the slight sales decrease at Applebee's. 

Chief Executive Julia Stewart noted that IHOP is "still number one in market share in family dining, and people have always loved us and thought of us first and foremost." Of the eight analysts following the stock,  five have a hold recommendation and three a buy, with the average target price for the stock being $77.80, a 7.5% upside. With DineEquity, Michael Dell's hedge fund could be on target. 

Let's drive
 
MSD Capital's second largest holding is Asbury Automotive Group (NYSE: ABG)making up 21%, according to the fund's 13F. Asbury Automotive Group is one of the largest automotive retailers in the United States. It sells, finances, and services a diverse range of foreign and domestic autos. 

Asbury saw EPS improvement of 42.6% during the first quarter, making it the fourth consecutive quarter of record results. During 2012 EPS was up to $2.64 compared to $1.42 in the previous year. The market is expecting Asbury to grow EPS to $3.12 this fiscal year.

Thanks to rising demand in autos, analysts think Asbury's sales will be up 9.2% in 2014 and 4.9% in 2014.  The market expects U.S. light vehicle sales volume of 15.4 million units in 2013, up from 14.4 million in 2012. The benefits to Asbury Automotive should be great. The auto retailer is expected to see a bright future, with analyst expecting EPS to grow at an annualized 23.8% over the next five years, which puts its PEG at a mere 0.55.

Let's dress


PVH Corp (NYSE: PVH) is another top holding, and accounts for 15.1% of the portfolio. PVH is a maker and distributor of men's and women's apparel under brands such as Van Heusen, IZOD, Calvin Klein, and Tommy Hilfiger.

The recent big move for PVH is its acquisition of Warnaco Group, which is expected to spur growth in the Asian markets, where Warnaco has an impressive presence. The acquisition will also put the Calvin Klein brand under one roof, whereas Warnaco previously licensed the Calvin Klein jeanswear and underwear businesses.

The company beat 1Q EPS expectations, posting $1.60 versus consensus of $1.50, and also set fiscal 2014 EPS guidance at $7.00. Fifteen analysts have the stock rated a "buy," while only four have the stock as a "hold." Consensus shows that analysts expect PVH to grow EPS at an annualized 12.1% over the next five years. The consensus price target is $119.40, a 6% upside from current levels. 

Billionaire Ken Griffin is alongside Dell as one of PVH's largest hedge fund shareholders (check out Griffin's latest buys). 

Let's make sure our car runs

Delphi Automotive (NYSE: DLPH) makes up 14.6% of the MSD Capital portfolio and is its fourth largest holding. Delphi is a vehicle components manufacturer, providing electronic, powertrain, safety and thermal solutions to the global auto industry. Like the tailwinds for Asbury, a rise in global auto sales should help lift Delphi.

Delphi has a global presence and has strategically located over 90% of its production in low-cost regions. Delphi is still a turnaround play after dumping its unprofitable European businesses.

Revenue growth in Asia is expected to outpace other regions, where Delphi already has a strong backlog. Also, the acquisition of FCI Group's Motorized Vehicle Division in 2012 is expected to boost operating margins and be accretive to 2013 EPS. Much like Asbury, Delphi is expected to grow EPS at an impressive 16.4% annualized rate over the next five years, putting its PEG at only 0.69. 

Billionaire Paul Singer's Elliott Management is heavily concentrated in Delphi, with nearly 30% of its portfolio invested in the company (see Elliott's top picks). 

Bottom line

Although the attention for Michael Dell centers around the future of the tech company that bears his name, he has some notable bets placed on some under the radar stocks. DineEquity is an undervalued play in the small-cap restaurant space. I also think higher employment and increasing consumer spending will be positives for PVH, not to mention the tailwinds related to the Warnaco acquisition. Both Asbury and Delphi should perform nicely on the back of a rebound in auto demand. 
 

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Marshall Hargrave has a position in Dell. The Motley Fool owns shares of Asbury Automotive Group. 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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