By Matt Doiron
Andreas Halvorsen co-founded hedge fund Viking Global in 1999 with two other "Tiger Cubs" who have previously worked at legendary investor Julian Robertson's Tiger Management. Those two co-founders have since left and due to the fund's strong performance over time, we have estimated that Halvorsen has become a billionaire; he reportedly earned $325 million last year. We compile 13F filings from hedge funds such as Viking Global in our database. This allows us to research investment strategies (for example, the most popular small-cap stocks among hedge funds tend to beat the S&P 500 by an average of 18 percentage points per year) and also to compare an individual fund's activity over time.
When going through Viking Global's 13F, we noticed that the fund closed its position in Apple Inc. (AAPL) during the fourth quarter of 2012 and increased its holdings of Qualcomm (QCOM) by 12%. See what else Halvorsen was buying and selling last quarter. This played into a larger trend, in which Apple lost its place as the most popular stock among hedge funds to American International Group (AIG) (find more of hedge funds' favorite stocks).
Qualcomm, which has outperformed Apple year-to-date as its stock price is about flat, reported results for the first quarter of its current fiscal year (the quarter which ended in December) about a month ago. The company experienced a 29% increase in revenue compared to the same period in the previous fiscal year; net income was up 36%. Qualcomm benefits strongly from the growing smartphone market, as its chips are crucial smartphone components across the market - including in both Apple and Android offerings. A look at the 10-Q shows that the company's growth was driven by both its technology business (which is responsible for about two-thirds of sales) and its intellectual property licensing business (which composes nearly all the rest of Qualcomm's revenue). Now, growth cannot be sustained at these levels for a long period of time but we do think that double-digit growth rates are attainable as long as smartphone penetration increases as fast as it has.
Yet the trailing earnings multiple for Qualcomm is only 17, a valuation at which the implied earnings growth rate is more modest. Analyst consensus for the current fiscal year, ending in September 2013, is for $4.50 in earnings per share; Qualcomm is expected to then earn $4.86 per share in the following fiscal year. This makes for a forward earnings multiple of only 14, and we think it's generally sufficient to generate even moderate growth at that pricing in order to be undervalued. So if the company is successful in meeting expectations - and it's generally narrowly beaten the Street recently - it could certainly qualify as a "growth at a reasonable price" stock.
Of course, Apple isn't expensive either: the stock carries trailing and forward P/Es of 10 and 9, respectively. Its most recent quarter saw 18% revenue growth and flat earnings, even with the quarter being one week shorter than a year earlier. As such, the market is pricing in a decline in Apple's earnings despite its strong position in tablets and smartphones. We can see gross margins falling as the market expands to more price-sensitive customers, we're certainly not as bullish as Wall Street analysts (Apple's five-year PEG ratio is 0.5), and there is something to be said for buying a stock which also benefits from adoption of Android phones. Still, we'd be hard pressed to recommend selling Apple and buying Qualcomm as Viking Global did.
Qualcomm does have better growth prospects than Apple, and the company's valuation doesn't seem to be pricing in enough of an upside (though, of course, we wouldn't guarantee that Qualcomm will meet expectations). However, Apple itself seems to have too much of a downside priced in - particularly, if the company commits to returning more cash to shareholders - and we'd say it's too much of a value stock to sell it in favor of Qualcomm. We'd pick Apple if we had to only own one of the two, though certainly many investors would want to consider both companies.