By Matt Doiron
Joel Greenblatt has become a somewhat well-known name in investing circles due to his time managing Gotham Capital, his several books on investing including You Can Be A Stock Market Genius, and his founding of the Value Investors Club. In mid May, Greenblatt's Gotham Asset Management filed its 13F with the SEC, disclosing many of its long equity positions as of the end of March. We have found that these filings can be a useful source of information for investing strategies (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 of course they can also serve as a useful source of initial investment ideas. Read on for our thoughts on the five largest holdings by market value in Greenblatt's portfolio with both trailing and forward earnings multiples, see the full filing on the SEC's website, and compare these picks to those in previous filings.
Greenblatt's top pick was Warner Chilcott (WCRX); the filing shows that he bought 1.4 million shares of the drug manufacturer in the first quarter of 2013. Unfortunately for investors, it looks like Greenblatt had excellent timing with this buy: earlier in May Actavis announced a deal to acquire the company, and as a result the stock has soared 63% year to date. The gap between the current price and the transaction price appears very narrow, and the deal is not expected to close until about the end of 2013.
The value investor has been a fan of Gamestop (GME) for some time, and reported a position of about 660,000 shares at the end of March. The stock has actually risen 90% in the last year, yet this has left it valued at 10 times forward earnings estimates. 46% of the float is held short, and concerns have been raised that used game sales (a sizable portion of Gamestop's business) will be impacted by restrictions placed on used games in Microsoft's new Xbox One system. The company's revenue was about flat in its most recent quarter compared to the same period in the previous year.
Another popular short target among Greenblatt's top picks was $3.3 billion market cap drug manufacturer United Therapeutics (UTHR); the filing disclosed ownership of a little less than 300,000 shares. While earnings were down last quarter compared to the first quarter of 2012, the stock is arguably trading at value levels with a trailing P/E of 12. Wall Street analysts expect high earnings growth over the next several years resulting in a forward earnings multiple of 9 and a five-year PEG ratio well below 1. Investors who are willing to invest in healthcare stocks might want to take a look.
According to the 13F, Greenblatt trimmed his stake in Tempur-Pedic (TPX) but the mattress company (which recently acquired peer Sealy) was still one of his top picks. In the first quarter of 2013, revenue increased only slightly versus a year earlier and net income declined sharply. The sell-side is forecasting a recovery, with their consensus estimates implying a forward P/E of 13. There is some potential for Tempur-Pedic to be helped by industry consolidation, though it does also bear integration risk and so this degree of improvement looks a bit speculative to us.
Cisco (CSCO) rounds out our list of Greenblatt's largest holdings from Q1 2013. Specifically, the filing showed a stake of over 770,000 shares (essentially unchanged from three months earlier). The networking technology company looks to be trading in value territory, carrying trailing and forward earnings multiples of 13 and 11 respectively. Business has been decent and we'd be interested in learning more about the company. Going by current prices and recent dividend payments, the stock pays a dividend yield of 2.8%.