By Matt Doiron
We track 13F filings from hedge funds and other notable investors as part of our work researching investment strategies; we have found, for example, that the most popular small-cap stocks among hedge funds generate an average excess return of 18 percentage points per year. While these filings aren't due until six to seven weeks after the end of the quarter, some parties file them early; Navellier & Associates, which is managed by Louis Navellier, has already done so, disclosing many of its long equity positions as of the end of March (see the full 13F from the SEC). Read on for our quick take on the asset manager's top five picks and compare them to previous filings.
Navellier's top pick as of the end of March was Alliance Data Systems Corporation (ADS), reporting a position of about 510,000 shares. Alliance is an $8 billion market cap customer rewards program company, which has been experiencing high growth recently: in the fourth quarter of 2012, revenue and earnings each grew at double-digit rates versus a year earlier. The market has already priced in some future earnings growth, judging by the trailing earnings multiple of 24, but Alliance might be well priced given its recent performance. A number of traders are bearish with 22% of the outstanding shares held short, so those interested in Alliance as a growth stock should be wary.
Visa Inc (V) was another of Navellier's largest holdings by market value as the asset manager disclosed ownership of about 450,000 shares. Visa is also priced for growth: analyst consensus for the fiscal year ending in September 2014 implies a forward P/E of 20. The stock is up 39% in the last year, and the most recent quarterly report shows good results on both top and bottom lines. Still, the valuation is quite aggressive, including compared to other credit card stocks, and so from a value perspective we would at least want to take a look at Visa's competitors first.
The filing had Equinix Inc (EQIX), a data center services company with a market capitalization of over $10 billion, as another top pick. Equinix is a particularly speculative growth stock- the forward P/E here is 41- though we have noticed a number of other hedge funds taking large positions in the company in the past couple quarters and data centers do certainly have the potential to be a growth business in an age of Big Data. In addition, revenue and earnings were both up strongly in Q4 compared to the fourth quarter of 2011. However, short interest is high at Equinix and it's possible that a number of big names are taking that side of the trade as well.
Twenty-eight billion dollar market cap company Marathon Petroleum Corp (MPC) was another of Navellier's favorite stocks with the 13F showing about 800,000 shares in their portfolio at the beginning of this month. The refining and marketing company is a bit different from the others we've discussed in the sense that it is more of a pure value stock: Marathon Petroleum (not to be confused with Marathon Oil) trades at 9 times earnings on either a trailing or a forward basis. Wall Street analysts expect some earnings growth over the next several years resulting in a five-year PEG ratio of 0.8, and we'd be interested in taking a closer look at the company.
Navellier owned about 370,000 shares of biotechnology company Biogen Idec Inc. (BIIB). Biogen is a large ($47 billion market cap) and profitable company. The valuation looks high in terms of trailing earnings, but it's certainly quite possible that Biogen is developing new products which would be a reasonable source of earnings growth. Analyst expectations for 2014 make for a forward earnings multiple of 21, suggesting that the sell-side does expect business to improve. Still, we would avoid the stock since we have little familiarity with Biogen's products in development and therefore little confidence that the company will beat market expectations.