3 Long Ideas from the Hedge Fund Universe

By Ashish Sharma - June 22, 2012 | Tickers: KO, KRFT, WMT | 0 Comments

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Every quarter Bank of America analyst Mary Ann Bartels comes up with an analysis of 13F filings by the major hedge funds. Her report consists of the major buys and sells by the big funds and  lists of the top stocks in each sectors held by the major Hedge Funds. Here’s a list of the top ten Consumer Discretionary stocks that major hedge funds were holding at the last quarter end according to her recent report.

I scanned the above list for good long candidates and Wal-Mart, Kraft Foods and Coca Cola appear to be the most compelling long candidates.

Wal-Mart Stores, Inc. (NYSE: WMT)              

Wal-Mart has recently broken its 10 years trading range on the upside. The company offers an attractive risk reward opportunity at current levels and momentum seems to be favoring the stock as well.

Source: Google Finance

Wal-Mart has a track record of consistent growth and its Every Day Low pricing strategy makes it a defensive play with significant resistance to economic downturns. Wal-Mart’s dividend yield of 2.3% and low valuation of just 12.7x forward earnings also make it attractive.

In addition to the defensive nature of Wal-Mart, I also like its potential for growth going forward. In the US, I see growth coming from continued store format conversion and moderation in discounting and promotion which are likely to push up margins. Further, international growth in emerging and developing markets will add to the company’s growth and improve geographic diversification.

Kraft Foods Inc. (NASDAQ: KRFT)

I like Kraft because of its international growth potential and planned spin-off into two companies. Kraft is seeing excellent growth in international markets. Last year, its international segment contributed for 86% incremental YoY growth. I expect Kraft’s favorable international exposure will help it deliver above average growth than its peers.

T planned split into two companies also serves as a major catalyst. Kraft Foods recently received a favorable IRS ruling on the tax-free nature of this planned spin-off. The spin-off is scheduled to be completed by the end of 2012. Kraft foods will split into two companies: one consisting of its high growth snacks business and the other consisting of its stable return grocery business. This will highlight an above peer growth-profile of its snacks business and should help the stock to achieve a better valuation.

Kraft is trading at 14x forward earnings, which is at discount to its average 10-year historical PE multiple of 16x. The company has a dividend yield of 3% and a payout ratio of 58%. I believe Kraft’s stock offers an attractive risk-reward proposition at current valuations and would recommend buying it.

The Coca-Cola Company (NYSE: KO)

Coca-Cola is a good long term growth story with a stable business model. Coca-Cola derives more than 50% of its revenues from international markets and has good exposure toward emerging markets, making it a good proxy for global growth. Even in developed markets it continues to grow its volume and market share.

In 1Q12 the company reported 5% global volume growth, which was geographically broad-based. While the US (+2%), Germany (+3%) and Japan (+3%) continued to grow at low single digits, volume growth in emerging markets was stronger with China up 9%, India up 20% and Brazil up 4%. In revenue terms, Coca-Cola grew 5.6% YoY, which compares favorably with most of its large cap consumer staple peers.

Going forward, I expect this top line growth to continue and profit growth to outpace the top line growth.  In addition to favorable operating leverage, the bottom-line should benefit from the company’s restructuring initiatives to save costs.  The company’s strong profitability and cash flow should not only enable it to fund acquisitions, capital projects and dividend payments, but also to repurchase shares thereby providing an extra boost to EPS.

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