In this article I detail three stock selections from Bridgewater Associates, a top performing macro hedge fund. I reviewed Bridgewater holdings via Gurufocus. Bridgewater mostly invests via ETFs (91% of its equity book) but it also has several interesting stock picks that I detail in this article.
As I stressed many times in my blog, I think that investors should study hedge fund portfolios because hedge funds have more resources to analyze stocks and check financial information than the typical individual investor. For example, hedge funds like Bridgewater or Lone Pine have dedicated teams of analysts that spend countless hours reading everything they can about a specific stock or asset. I doubt that there are many individuals who can do this type of analysis. This is the main reason why I think that every investor should analyze prominent hedge fund portfolios. With this concept in mind, let´s analyze Bridgewater picks:
The software company that Bridgewater has been buying since 2008
Bridgewater holds 1 million shares of CA (CA), a software company that the fund has been buying every quarter since Q1 2008. The average cost for the fund is $22 which is not too stretched from the current price of $25.
CA has outstanding profitability metrics:
- Operating margin of 28.9%, better than 95% of its 262 peers in the software industry
- Net margin of 19.8%, better than 91% of its competitors
- ROE of 17.6%
- Consistent EBITDA and EPS growth
- Almost no debt
CA focuses in two segments: Mainframe and Enterprise Solutions. The first segment is the biggest but its future growth is very limited. I think the mainframe market is not in decline as IBM (IBM) (the biggest player in this market) continues to sell these products at a consistent rate every year. Enterprise Solutions business produces about 1/10x the profitability of the Mainframe Solutions business but it offers growth potential for CA. The investment thesis is simple: the market is valuing CA as it will always operate in the Mainframe business, not giving any credit for the growth that Enterprise Solutions could represent in the future.
In the last earnings report, CA demonstrated that the business is performing at top rates and management is slowly growing the Enterprise Solutions area. The company beat expectations across all metrics. While some of the upside came from early renewals of contracts that were originally scheduled for F4Q13, the quarter gave several strong positives:
- Greater attach rate of new product sales
- Improved execution in Europe
- Revenue outperformance was primarily a result of new software sales, which represents growth potential.
In terms of valuation, I think that shares are inexpensive. The lowest P/E ratio that CA traded in the past 5 years was 11x. Considering that management projected FY13 EPS of $2.36-2.44, this could translate into a target price of $27. The stock has limited downside from current levels.
EMC: the technology leader that top portfolio managers have been buying
Bridgewater initiated a position in EMC (EMC), an IT leader. In addition to Bridgewater, top portfolio managers Lee Ainslie, Ray Dalio, Jeremy Grantham, Joel Greenblatt, David Tepper and Andreas Halvorsen initiated or increased their holding in this company during Q4. This is evidence that EMC could be a compelling opportunity at current prices.
EMC has many positives in its core business model:
- Low CapEx business model: the company converts almost 80% of its Operating Cash Flow as FCF.
- High operating margin of 17%.
- High EPS growth of 16%
- Expanding operating margin.
I think that EMC valuation is attractive and the underlying Information Storage fundamentals remain compelling despite it could be affected by macro volatility. EMC shares underperformed in 2012 because IT managers under-spent in 2012 but n the last earnings call, EMC management projected a rebound in IT spending. In addition, EMC's storage portfolio is expected to have solid product cycles in 2013 including a VNX refresh.
A solid technology pick from Bridgewater
Intel has one of the most shareholder oriented management teams. Specifically, Intel bought back an additional $5.11 billion in shares last year after purchasing $14.34 billion the year before. Management is authorized to repurchase $5.3 billion more in 2013 which, with a dividend payout of $4.35 billion, amounts to a return to investors of approximately 10% of Intel's current market value. This is a huge number.
Intel has built, over the years, a solid franchise in microprocessors ("IntelInside") for PCs and vastly dominates the server market, where data center growth has been driven by demand for cloud infrastructure build outs. While Intel has struggled to capture share in the faster growing mobile markets I think there is substantial value in its core business at current stock prices of $21.5.
The market is overly pessimistic on Intel´s future prospects and only values the stock at 10x earnings. Considering that Intel has always found a bottom at 9-10x earnings I think that the margin of safety that the stock offers at these levels is compelling for long-term investors.