By Matt Doiron
The largest position reported in the 13F of Hedge Fund Edinburgh Partners was 4.1 million shares of SanDisk (SNDK), though this represents a small sale of shares since the beginning of January. In its last quarterly report SanDisk experienced a 2% decline in revenue compared to the fourth quarter of 2011, and earnings decreased by 24%. Combined with good stock performance over the last year, this has brought SanDisk to a valuation of 34 times trailing earnings. Wall Street analysts expect strong growth over the next several years, resulting in a forward P/E of 13 and a five-year PEG ratio of only 0.5, but we are skeptical.
Edinburgh disclosed ownership of about 270,000 shares of Google Inc (GOOG) as of the end of March. In the fourth quarter Google had been one of the most popular stocks among hedge funds (find more stocks hedge funds loved) and we're looking forward to finding out where it stood last quarter. Google is also priced for growth, though it does have a couple strong channels going for it: improved efficiencies against a year ago from better integration of Motorola Mobility Holdings, and organic growth in the advertising business. Analyst expectations for 2014 imply a forward P/E of 15, a valuation at which Google would not need to deliver much bottom-line growth to justify its price.
Nairn was selling Cisco (CSCO) but still had 9.8 million shares in his portfolio and this made the networking and communications company one of his top picks as well. Cisco looks cheap, with trailing and forward P/Es of 12 and 10 respectively, and given the fact that financial performance has been decent recently we think that it is worth considering as a value stock- even modest earnings growth over the next several years would make the company undervalued at the current price. We'd also note that Cisco pays a dividend yield of above 3%, though that has become somewhat common for large technology companies.
Applied Materials (AMAT), a $16 billion market cap provider of manufacturing equipment to semiconductor companies, was another of the fund's largest holdings. Revenue dropped 28% in the fiscal quarter ending in January 2013 versus a year earlier, which contributed to a 71% decline in net income. This had brought quarterly EPS figures quite low. The sell-side is projecting a strong recovery at Applied Materials, with the forward earnings multiple coming in at only 13, but those forecasts look quite aggressive to us and so we don't think it's a good stock to buy.
The fund had just under 7 million shares of Microsoft (MSFT) in its portfolio at the beginning of April. Consensus earnings estimates for the forward fiscal year (ending in June 2014) suggest an earnings multiple of 10, but a few factors keep us from recommending Microsoft as a value stock. First of all, that's actually in line with where Apple trades in reference to its trailing earnings; second, it likely includes a bump in earnings from sales of new versions of Windows and Office; third, we have some level of skepticism that Windows 8 will be as big as analysts expect. As a result we'd hesitate to get long Microsoft as well.
The SEC requires hedge funds and other notable investors to report many of their positions in U.S. stocks as of the end of each quarter in 13F filings. While these filings are not required for several weeks, sometimes funds submit theirs early. This is the case with Sandy Nairn's Edinburgh Partners, a large Scotland-based fund with a New York City office and substantial U.S. equity holdings. Read on for our quick take on the five largest holdings by market value from Edinburgh's filing for the end of March 2013, see the full 13F filed with the SEC, or compare the top picks to those in previous filings.