Billionaire Richard Chilton's Top Stock Picks

Includes: AIQUF, DG, GRA, LKQ, SHW
by: Insider Monkey

By Matt Doiron

Billionaire Richard Chilton's Chilton Investment Company filed its 13F with the SEC in mid May, disclosing many of its long equity positions in U.S. stocks as of the end of March. Even though the information in 13F filings is a bit old, there are still a couple different ways to use it: we have found that it's possible to develop investment strategies based on 13Fs (for example, the most popular small-cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) and we can also mine 13Fs for initial investment ideas. Read on for our thoughts on Chilton's five largest holdings by market value from the filing, see the full 13F on the SEC's website, and check out Chilton's holdings over time.

The fund increased the size of its position in W.R. Grace (NYSE:GRA) to a total of 2.5 million shares by the end of the quarter. W.R. Grace is a provider of specialty chemicals and materials, notably catalysts which are used for fuel production. The company's revenue fell 6% in Q1 2013 versus a year earlier, contributing to a 13% decline in net income. Wall Street analysts are predicting that W.R. Grace will recover, and as a result its earnings per share will increase over the next couple years, but we're not sure that the forward P/E of 16 is that attractive when compared to other chemicals companies.

Chilton was also buying shares of Dollar General (NYSE:DG), closing March with a little over 3 million shares as opposed to 2.8 million three months earlier. At 19 times trailing earnings, Dollar General is valued several turns of EPS above where big-box discount retailers such as Target and Wal-Mart are trading. In addition, its recent financial performance has not been particularly strong, with revenue growing at an especially slow rate. As with other dollar stores (and value retailers in general), Dollar General does boast a low beta (0.1 in this case) though we think that defensive investors should still be wary of the valuation.

Sherwin-Williams (NYSE:SHW) was another of Chilton's top picks. The paint manufacturer and retailer has been a somewhat popular way to play the recovery in housing prices, helping the stock rise over 60% in the last year. However, the business has lagged market expectations- while earnings did grow 16% last quarter compared to the first quarter of 2012, sales were up only slightly and the stock is currently valued at 31 times trailing earnings. The sell-side is forecasting good earnings growth but we're still not sure that Sherwin-Williams makes for such an attractive growth stock.

The filing showed Chilton owning 1.3 million shares of Airgas (ARG), a $7.7 billion market cap provider of industrial gases, as of the beginning of April. The fourth quarter of the company's fiscal year ended in March; during that quarter, performance was essentially flat from its levels a year ago. Airgas also appears to be a stable company in general, with little exposure to the broader economy (the stock's beta is 0.4). However, as with Dollar General the stock does appear a bit pricey to us, and so we'd recommend looking elsewhere if the industry is of interest to an investor.

Chilton disclosed ownership of 5.1 million shares of replacement auto parts company LKQ (NASDAQ:LKQ). Earnings multiples are high here - the stock trades at trailing and forward P/Es of 29 and 20, respectively. In addition, we're less than confident that LKQ is on the path to hitting these analyst targets with earnings rising only 4% in its most recent quarter compared with the same period in the previous year. We suppose that LKQ serves as an auto-related company with less dependence on new car sales, possibly even seeing a downside in that case, but it still doesn't seem like a good value at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.