I like to track prominent hedge fund holdings. In this article I analyze Glenn Greenberg's Brave Warrior Capital holdings. Greenberg invests in companies with little competition, and places a great deal of emphasis on Return On Invested Capital (ROIC). The fund has a portfolio value of $1.6 billion and its 10 top holdings equal 90% of the whole portfolio, an evidence of Brave Warrior's focus on position concentration. You can review Brave Warrior holdings here. Let's see what Brave Warrior likes:
A Solid US Bank
Brave Warrior initiated a position in US Bancorp (USB) at an average price of $32. The fund holds 65k shares. This pick is shared by other top investors like Warren Buffett, Steve Cohen and Don Yacktman.
This bank delivers solid and consistent profits driven by its payment processing business that helps retailers and other businesses handle electronic transactions. This business is a strong moat for USB as it does not require significant capital expenditures. Remember the introduction of this article: Glenn Greenberg likes companies with high ROIC. In other words, companies that does not need significant amounts of capital to keep business alive.
US Bancorp has several strong metrics:
- Operating margin of 35%, which is higher than 87% of its competitors
- Net margin of 25.8%, higher than 89% of its peers
- ROE of 14.3%, the highest ROE in the banking industry.
- Solid EPS growth of 11%
- Stable business model
In terms of valuation, shares are cheap at 11x forward earnings and a P/TBV of 2.36x compared to the average P/TBV multiple of 3-3.5x that USB traded before 2011. Consider that even at the worst moment of the 2008 crisis, UBS did not traded below 2x book.
I also think we are far from a material change in the interest rates scenario but it may be a good time to start building a position in a bank that could double as soon as the market starts projecting a coming change in the Fed's interest rate strategy
The medical pick that value investors are buying
Brave Warrior initiated a position in Express Scripts (ESRX) last quarter at an average price of $57. Several top hedge fund managers also bought this stock last quarter, to name a few: Wallace Weitz, Lee Ainslie, Leon Cooperman, Mario Gabelli, Jim Simons and Ray Dalio among many others.
Express Scripts delivers prescription drugs through contracted and non-contracted networks to patients, physicians, medical providers, and clinics. More than 95% of all retail pharmacies in the United States participate in one or more of Express Scripts' networks. Express Scripts has the advantage of a drug distribution chain to manage costs far better than its competitors. As Express Scripts is the leader in this segment, its massive purchasing volume allows it to purchase drugs at a significant discount. It is like a virtual monopoly.
In the last earnings report, ESRX management guided FY13 EPS of $4.20-4.30 vs. $4.21 Capital IQ Consensus Estimate. Considering that the average P/E of ESRX is 25x, a forward P/E of 13x appears extremely compelling.
I am particularly bullish on the fact that ESRX management recently authorized a massive share repurchase. In the last 8-K ESRX´s Board of Directors authorized a new share repurchase program of up to 75 million shares (9% of 4Q12 diluted shares outstanding) with an indefinite duration. At current valuations this would represent north of $4B in repurchases, and I think this authorization amount is likely greater than expectations or what is currently embedded in consensus estimates. If I add this shareholder oriented action with solid fundamentals and the synergy potential from the MHS acquisition, I believe that shares are attractive at current valuations.
Vistaprint: hedge funds, insiders and the company itself is buying the stock!
Brave Warrior has been buying Vistaprint (VPRT) in every quarter since Q4 2011. In addition to this, the company itself is buying back shares and key insiders are quietly accumulating shares. A strong combination!
Vistaprint is consistently improving its gross margins. In the December quarter, which just finished, the company had a year-on-year improvement of 40 basis points on its gross margin. In addition to improving its key metrics, VPRT is constantly innovating and cross selling new products to an expanding customer base.
For example, Vistaprint recently developed Pagemodo, which is a Facebook builder. It's been a very innovative product that the company has been able to apply to its customer base. In addition, the company has been able to substantially upgrade the website builder, (VPRT own website builder), and in this year it will integrate the 'Webs' website builder into Vistaprint main engine, which will improve the company´s cross-selling capabilities.
A top consulting play
Brave Warrior allocates 6% of the equity portfolio in Fiserv (FISV).
Fiserv is a leading global provider of financial services technology serving approximately 16,000 clients worldwide. The company provides account processing systems, electronic payments processing products services, internet and mobile banking systems, and related services. Fiserv handles more than $1 trillion in payments and manages more than 20 billion digital transactions annually, generating an attractive net profit margin of 13% and a Return on Equity of 18%.
Fiserv has several strong positives: a solid leadership position, defensive business model, future growth, a shareholder oriented management team and good quarterly results. In addition, FISV is attractively priced.
In terms of valuation, the stock is trading at just 14x 2013 consensus estimate, which is at the bottom of the five-year range of 12.5-20x. Fiserv's 3Q12 results, reported on October 30, were solid. Considering that a neutral P/E for FISV is around 16x, it would be reasonable to expect that shares could get to $95 (16x times EPS of $5.9).
Other top stocks that Brave Warrior invested
I like Google because the market is underappreciating new advertising platforms in mobile, display and video that are approximately 10% of net revenue and are growing at 100% annually. I am bullish on Google's prospects in these emerging areas.
Brave Warrior holds 4.2 million shares of Oracle and increased the position by 5% last quarter. I think the company has a strong business model and a compelling valuation at only 14x forward earnings.
Disclosure: I am long FISV.