AllianceBernstein’s Top Buys: 2 Potential Longs, 1 to Avoid
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AllianceBernstein L.P. is an investment advisory and hedge fund firm managing around $150 billion in equity assets. The firm manages the AllianceBernstein series of mutual funds, in addition to other funds, and caters to individuals and institutions. The firm’s investment process is generally driven by fundamental company research and quantitative analysis.
In this article, I will be discussing three top buys of AllianceBernstein from the last quarter, as released in its most recent 13F filing with the SEC.
Wells Fargo & Company (NYSE: WFC): AllianceBernstein bought 12,938,160 shares of Wells Fargo last quarter. Wells Fargo is one of the safest large cap banking stocks with solid capital ratios. Its Tier I common ratio was 9.95% at the end of last quarter (~7.8% on Basel III basis). Thanks to its solid fundamentals, Wells Fargo is authorized to purchase more shares in 2012 than they did in 2011 (~86 million).
I expect Wells Fargo to be a beneficiary of flight to quality. The poor financial state of its competitors presents a significant market share gain opportunity to Wells Fargo. In addition, the company’s significant cost cutting opportunity through “Project Compass” should help it increase its EPS even in a slow growth environment.
The company is likely to achieve a 4Q12 expense run rate of ~$11.25 billion versus ~$13.08 billion in 4Q11 due to its cost cutting initiatives. Wells Fargo is currently trading in line with its peers at 8.69x 2013 EPS estimates. I believe it deserves a premium to its peers given the company’s leading return on tangible equity and better book value growth potential. Hence, I’ll recommend buying the stock.
Cisco Systems, Inc. (NASDAQ: CSCO): AllianceBernstein bought 11,543,461 shares of Cisco last quarter. Cisco reported inline revenues last quarter and its EPS was better than consensus by 1 cent. However, what spooked some of the investors was Cisco’s guidance for revenues/EPS, which was 3%/3 cents below expectations. I believe most of this weakness in the company’s guidance is macro-related and the company continues to execute well. The stock has corrected over 10% since earnings and I believe at current valuations it is already pricing in weak macros. With a strong product portfolio, low valuations (~8.58x forward earnings), high cash flow generation (~9% FCF yield), and a solid balance sheet (~$6 net cash per share), I believe the company offers an attractive risk-reward proposition.
Investors can also consider Cisco’s peer Juniper (NYSE: JNPR) for investment. Juniper is trading at ~15x forward earnings and has an excess cash of $3 per share. I expect a second half ramp up in carrier spends as well as traction in newly launched products (T4000, PTX and QFabric) to help the company’s stock price.
MGM Resorts International (NYSE: MGM): AllianceBernstein bought 32,268,237 shares of MGM last quarter. I don’t like MGM because of its highly levered balance sheet with a net debt to equity ratio of 4. The company reported disappointing results last quarter and its RevPAR growth decelerated to 4% from double digits in 2011. The company is expected to post negative EPS in the current year and the next. I am concerned about the near term trends in Las Vegas and difficult comparisons in Macau, and would avoid the stock until some more clarity emerges on the company’s turnaround and recovery. The company is trading at a discount to its peers at ~10x EV/EBITDA. However, I believe this discount is justified given the company’s highly levered balance sheet and volatile trends in Las Vegas.
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool owns shares of Wells Fargo & Company and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company, short OCT 2012 $33.00 puts on Wells Fargo & Company, and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & 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.If you have questions about this post or the Fool’s blog network, click here for information.