By Matt Doiron
Jeffrey Vinik returned money to outside investors in 2000, but continues to manage his own money as well as that of friends and family. He filed his 13F for the fourth quarter of 2012 in February, disclosing many of his long equity positions as of the end of December. We track these filings as part of our work on developing investment strategies (for example, the most popular small-cap stocks among hedge funds earn an average excess return of 18 percentage points per year) but it can also be useful to see what stocks top managers like. Here we look at five of Vinik's cheap stock picks, as in those with both trailing and forward price-to-earnings multiples of 13 or lower (or see the full list of stocks Vinik reported owning):
Vinik increased his holdings of HollyFrontier Corp (NYSE:HFC), an $11 billion market cap oil and gas refining and marketing company, by 48% to a little over 810,000 shares. Improved margins caused earnings to rise 75% last quarter compared to the fourth quarter of 2011, and the stock price is up nicely over that same time frame as well. Analyst expectations are that the bottom line will correct a bit, but the forward P/E is still 10 - a figure which we'd normally associate with steady to even slightly declining net income. With the business doing well at this point it might be worth investigating.
The 13F reported a position of 620,000 shares in LyondellBasell Industries NV (NYSE:LYB), a large increase from the beginning of October. At a market capitalization of $37 billion, the chemicals and refining company trades at 13 times trailing earnings. Wall Street analysts are forecasting substantial earnings growth for the next couple years and the forward P/E is 9. We'd note that the stock is sensitive to broader economic conditions, with a beta of 2.5. Billionaire Dan Loeb's Third Point cut its stake slightly but still had 2.4 million shares in its own portfolio (check out Loeb's stock picks).
According to the filing, Vinik owned a little over 620,000 shares of AGCO Corporation (NYSE:AGCO), more than double what it had owned three months earlier. AGCO provides agricultural equipment and parts; a number of investors are bullish on agriculture related stocks given the growing world population and increasing demand for meat (which is more agriculturally intensive to produce) as consumers get richer. The market is generally not expecting high growth, however, with the result being earnings multiples of about 10. AGCO is another stock whose movements are correlated to those of market indices with a beta of 2.1.
The $8.2 billion market cap Korean telecom company KT Corporation (NYSE:KT) was another of Vinik's stock picks. KT experienced a 3% decline in revenue in the fourth quarter of 2012 versus a year earlier, and combined with tighter margins this led to a significant decline in earnings. The stock carries trailing and forward P/Es of 8 and 7, respectively, and in terms of cash flow the valuation also looks cheap with an EV/EBITDA multiple of 4.5x. That of course isn't sufficient to make it a buy, particularly given the Q4 performance, but the multiples are low enough to give KT value potential.
Rounding out our list of Vinik's cheap stock picks was Deere & Company (NYSE:DE). In its most recent quarter, which ended in January, Deere reported 22% higher earnings than in the same period in the previous fiscal year; this was caused about equally by 10% revenue growth and wider net margins. Deere, of course, would go along with a similar macro agriculture thesis as AGCO. Despite those prospects, and the good quarter, Deere's trailing earnings multiple is 11. As such it only needs modest growth in order to prove undervalued at these levels and so it's another stock we'd recommend taking a closer look at.