By Matt Doiron
Several weeks after the end of each quarter, hedge funds such as billionaire and Tiger Cub Andreas Halvorsen's Viking Global file 13Fs with the SEC to disclose many of their long equity positions. We track these filings in our database 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) and so we can also see which stocks individual managers have liked over time. Here are the five largest holdings in Viking Global's portfolio at the beginning of this year, which it had at least $150 million invested in at the end of 2010 (or see the full list of Halvorsen's stock picks):
The fund owned 8.1 million shares of Estee Lauder (EL) at the end of the fourth quarter of 2012. Investors are quite bullish on the beauty products company, with the current market capitalization of $27 billion resulting in a trailing earnings multiple of 28. Earnings did grow 37% in its most recent quarter compared to the same period in the previous fiscal year, but revenue only rose by 2%; as a result we'd be concerned about the sustainability of Estee Lauder's earnings growth since it is so dependent on higher net margins.
Halvorsen and his team cut their stake in LyondellBasell (LYB) by 20% between October and December, but the chemicals company was still one of their ten largest holdings. With demand for chemicals being tied to the broader economy, LyondellBasell's beta is 2.5; the stock has indeed outperformed a rising market over the last year, up 55%. It too has delivered earnings growth recently, though revenue has actually declined from a year ago in this case. Billionaire Dan Loeb's Third Point disclosed ownership of 2.4 million shares (find Loeb's favorite stocks).
Crown Castle International (CCI) has been another of Viking Global's long-term picks. Crown Castle owns over 30,000 wireless towers in the U.S. and Australia and rents access to communications companies. Some investors have speculated that the company could convert to a real estate investment trust, which would increase shareholder value as the business would then receive favorable tax treatment as long as it distributed a large share of its cash to shareholders. Crown Castle is also a potential defensive pick with a beta of 0.4.
Another "towers" company which the fund has liked for the past couple years is global communications site company American Tower (AMT). American Tower has already converted to an REIT structure, though thus far its dividend payments have been fairly low relative to its valuation with a current yield of 1.2% (the requirement to distribute cash to shareholders often results in high yields at REITs). However, it too is very stable from a statistical perspective as the stock carries a beta of 0.1.
Viking Global reported a position of 3.9 million shares in $22 billion market cap pharmaceutical company Valeant Pharmaceuticals (VRX). Revenue was up 25% in the first quarter of 2013 versus a year earlier, and the company managed to nearly double its operating income, but high interest expenses caused Valeant to report a considerably larger (unadjusted) net loss than in Q1 2012. The company expects $5.70 in EPS for 2013, which would make for a P/E multiple of 13; if it hits that target it might be a good value considering its growth.
As such it's possible that Valeant is worthy of further research, though investors should do due diligence on the factors which management is counting on to drive its internal earnings forecast for the year. We'd recommend avoiding Estee Lauder, as the valuation seems a bit high in terms of recent performance. LyondellBasell is of some interest, though we'd have to look into how the company might maintain its current level of earnings rather than experience further declines.