Two of Ken Griffin’s Top Stock Picks
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As the founder of Citadel Investment Group, mega-fund manager Ken Griffin is in rarified air; his portfolio has amassed more than $50 billion in assets under management in a little over two decades. As seen in this Top 10 list, Griffin’s fund is one of the largest in the world, behind icons like Ray Dalio and James Man. Relying on a host of personally developed financial algorithms (related video here); Citadel returned more than 20% in 2011. While individual investors should not use the 13F filings of hedge fund managers as an end-all-be-all list, they can provide a starting point for further research. Without further ado, here are two of Ken Griffin’s favorite long-only holdings.
Apple (NASDAQ: AAPL)
As reported on its most recent 13F filing, Citadel holds just under 2.3 million shares of AAPL worth $1.4 billion. In 2012 alone, the tech giant has returned 55.9%, outpacing the computer systems industry average (30.5%), and competitors like Google (NASDAQ: GOOG) at 3.5%, and Microsoft (NASDAQ: MSFT) at 16.1%. From an earnings standpoint, the company has dominated its peers, generating annual earnings growth of 59.8% post-recession. The Street is expecting similar expansion this year, as estimates average $43.89 a share, up 58.6% from the $27.68 it reported in 2011. Now, we know that Apple had a rare earnings miss last quarter, but the subsequent sell off may have provided a buying opportunity for ardent investors.
The stock currently trades at a Price-to-Earnings ratio (14.8X) below GOOG (19.7X), MSFT (15.1X), and its own 5-year historical average (21.9X). In fact, over the last half-decade, Apple’s earnings have traditionally traded at a 45% premium to those of the S&P 500. This year, they are much cheaper, trading at parity. Moreover, when growth is factored into the equation, we can see that AAPL sports a PEG ratio of 0.6; any number below 1.0 typically signals undervaluation. As can be expected, this is also below the likes of GOOG (1.1) and MSFT (2.1).
Assuming that Tim Cook & Co. can reach year-end earnings estimates, fairly valued shares of AAPL can eclipse $700 by Christmastime; they currently trade in the $640 range. Throw in the potential for a deal with China Mobile, which we’ve covered in-depth here, and this may be the type of news that catapults the stock to a fairer valuation.
E*TRADE Financial (NASDAQ: ETFC)
Valued at more than $230 million, Griffin’s holdings of ETFC are substantial – 27.4 million shares to be exact. Since the start of this year, shares of this online discount brokerage firm have risen by nearly 9%, outpacing TD Ameritrade at 7.5%, but behind Charles Schwab (NYSE: SCHW) at 15.9%. The company has been in the news recently for firing its CEO, Steven J. Freiberg, after stating a desire to enter “the next phase of its evolution.” Before this move, the company’s balance sheet had been accumulating undesirable levels of CDOs (explained here), which is undoubtedly one of the reasons why Griffin asked for strategic overview last year. Last quarter, revenue fell by more than 12%, as trading activity and commission fees fell greater than expected. Interestingly, the fund manager is on the team responsible for finding a replacement CEO, and it is speculated that the group is looking for a candidate open to a future acquisition.
Any further news of a deal are likely to boost shares of ETFC to a fairer valuation, as it currently trades at P/E (15.1X) and P/B (0.5X) below the capital markets industry’s averages (18.7X, 0.8X), and peers like AMTD (15.2X, 2.1X) and SCHW (19.0X, 2.0X). At a measly PEG ratio of 0.4, it appears that investors are still under-appreciating the brokerage firm’s earnings growth, which is expected to rise by 28.4% between then end of 2012 and 2013. If E*TRADE can reach 2013 EPS estimates of $0.56 a share, its stock has $11 upside. WealthLift’s Sentiment Index rates ETFC as a hold, with the community’s users split on what the future may bring. In the mean time, it will be wise to check up on any CEO and acquisition rumors surrounding the company. WealthLift INSIDER will keep you updated.
Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Charles Schwab, Google, and TD AMERITRADE Holding. 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.