By Marshall Hargrave
Navellier & Associates was founded in 1980 by Louis Navellier, after receiving his MBA from Cal State Hayward in 1979. Navellier's strategy rallies around a focus on growth investments and a grading system for stocks. According to Navellier, over the past thirteen years his "A" graded stocks have returned over 1250% compared to the SPY's 60%. He also breaks his criteria into two factors - one being fundamental and the other related to buying pressures. Navellier's fundamental aspects rely on determining business health, where technical indicators are used to measure buying pressures and entry points. Navellier recently filed its 4Q 13F with the SEC, which reveals the majority of the hedge fund's major public equity holdings. After reviewing the 13F, we have identified some shakeups that Navellier made during the fourth quarter.
Lowe's Companies (LOW) was the biggest new addition for Navellier. This home improvement retailer now takes up the 8th spot in the fund's 13F portfolio. Lowe's expects sales up 3% in FY2014 on the back of an expected flat FY2013. Driving future growth should be new store openings and strong demand from a long-term uptrend in the housing market. A housing market bottom and a loosening of bank standards should be what propels the housing recovery, generally speaking. Lowe's has relatively low debt and a strong cash position with nearly $1.1 billion on hand, but this retailer has still lagged its major competitor Home Depot (HD) on a stock performance basis. Over the past year, shares of Lowe's are up 42.6% compared to Home Depot's 51% return.
From a valuation standpoint, Lowe's and Home Depot generally trade in lockstep, with very close P/E ratios, dividend yields, profit margins and debt levels. We do believe that Lowe's stands apart when digging a bit deeper into the metrics. Lowe's trades at P/S and P/CF ratios of 0.8x and 12x, while Home Depot trades at 1.3 times sales and 16 times its cash flow. Billionaire Ken Griffin - founder of Citadel Investment Group - upped his stake in Lowe's nearly 1,000% in 3Q.
Discover Financial Services (DFS), meanwhile, is another one of Navellier's newest picks. The credit card company now makes up 1.6% of the fund's 13F and is its 15th largest 13F holding. Discover has been a steady performer over the past ten years, growing sales at an average of 2% per year, but 3Q results showed revenue growth of 11% from the same period last year, and FY2013 revenues are expected to be up 8%.
Along with its entry into the payment servicing business, we see why Navellier is excited about Discover. A recent payment processing deal was made with eBay (EBAY) and PayPal, and will permit businesses accepting Discover to allow customers to pay for merchandise via PayPal. George Soros appears to have a different opinion than Navellier, though, as he sold off 50% of his stake in Discover last quarter.
eBay Inc., the e-commerce auction leader, is expected to see revenues up 20% this past year and 14% growth in 2013. The stock was another one of Navellier's newest picks, now making up the 19th spot in the fund's 13F. eBay is the undisputed leader in the online auction market, with continued ability to further grow internationally. The other key long-term driver for eBay should be its payments segment. The tech company's marketplace revenues are only expected to come in with annual growth of 10%, where the payments segment - PayPal - should be up 26%. Compared to the valuation of other major e-commerce peer, Amazon (AMZN) (3000x), eBay trades at only 18x earnings.
Altria Group, Inc. (MO) saw Navellier dump its entire stake of the tobacco company last quarter. Altria had made up 1.2% of the fund's 3Q 13F portfolio, but we believe that Navellier has found better growth investments amidst a rebounding economy. This is in part being driven by the expected mid-single digit decline in cigarette industry volumes over the next few years. As the leading U.S. cigarette manufacturer, Altria has the most exposure to this secular decline. This and Altria's valuation are solid reasons to consider shedding some shares. Altria trades above its closest peers on a P/E basis at 17x, compared to Reynolds America (RAI) (16x) and Lorillard (LO) (15x).
International Business Machines (IBM) is a diversified tech giant with revenues expected to be down 3% in 2012. The company reports its 4Q earnings on January 22nd. IBM was one of Navellier's biggest holdings in 3Q - taking the 7th spot in its 13F - before the firm sold off 98% of its stake in 4Q. Although IBM has a diverse business model, it has not been immune to IT spending cuts, with hardware sales falling each of the last four quarters. From a valuation standpoint, nothing special for IBM stands out - the stock trades in line with key competitors on a P/E basis at 14x, compared to Oracle (ORCL) (16x) and Microsoft (MSFT) (14x). Interestingly, Warren Buffett is still a big fan of IBM, having nearly 20% of his 13F invested in Big Blue at the end of last quarter.
What else is new?
Other notable moves and shakes that Navellier made include:
A sell-off of Bristol-Myers Squibb (BMY), in which the fund sold its entire stake of the drug maker. It had been Navellier's 16th largest 3Q 13F holding, worth 1.8% of its 13F portfolio.
A 99% sell-off of its Ross Stores (ROS) stake, but it's worth noting that Navellier held on to its TJX Companies (TJX) shares - the stock is now its 7th largest 13F holding. We take this as a vote of confidence for Ross Stores' peer TJX.
A sale of Verisign (VRSN) after adding the tech company to its portfolio during 3Q.
One big addition was Marathon Petroleum Corp (MPC) - now the fund's 14th largest 13F holding.
In short, it appears that Navellier has made some big bets on the mobile payments sector with Discover and eBay, but also on a leading home improvement retailer. Meanwhile, the fund has lost faith in one of the largest tech companies - IBM - and one of the biggest tobacco companies in Altria. The conclusion one can draw from these moves is that Navellier believes the best growth opportunities in the future will be in mobile, payment processing and a rebounding economy, with the latter being driven by a better housing market.
Disclosure: I am long MSFT.