Individual investors often wonder how major shareholders like David Tepper and Jim Simons can continuously make profits and ensure solid returns over time. With the harsh macroeconomic environment, wouldn't one suppose it might be difficult to select the stocks that will create an outstanding portfolio?
The truth is that no one knows for sure, but to improve your odds, why not just check some stocks owned by successful hedge fund managers? While billionaires pick incredibly profitable companies for long-term investments, there are also other stocks that have proven to be ways to ensure profit. One such stock is EMC Corporation (EMC).
Currently held by fund managers such as Tepper, Simons, Ken Griffin, Israel Englander, and Steve Cohen, EMC has been a good investment with an EPS growth of 23.74% per year for the past five years. It has outpaced peers like IBM at 14.17%, Hewlett Packard (HPQ) at 1.29%, and Cisco (CSCO) at 7.74%. Collectively speaking, the hedge fund managers mentioned hold a reasonable portion of their capital in EMC. What are their reasons for the investment?
It is worth considering the state of EMC's surrounding macroeconomic environment. Delivering enterprise storage solutions and software in storage area networks, EMC's future is bright, as big data is becoming extremely popular. According to a new market report published by Transparency Market Research, the global big data market was worth $6.3 billion in 2012 and is expected to reach $48.3 billion by 2018. North America is expected to maintain its lead position in terms of revenues till 2018, with about a 54.5% share of the global big data market revenue.
EMC showed a second-quarter revenue increase of 6% compared with the year-ago quarter. This trumps Hewlett Packard (-10%), Cisco (5.4%), and IBM (-3%). EMC grew its earnings in the last quarter by 10% year-on-year, far above Hewlett Packard (-32%) and IBM (1% ), but lower than Cisco (15.0%). EMC saw recent increases in profitability through its massive growth in cloud computing, Big Data, and trusted IT solutions. It also thrived due to its unique technologies and independent partner ecosystems that offer customers greater choices.
Its earnings per share showed an 8% increase year-on-year. Of its peers mentioned here, only Cisco (15%) showed an increase in earnings per share. IBM (-8%) and Hewlett Packard (-32%) both suffered declines in their last quarterly report. Revenues from EMC's business operations outside the U.S. increased 8% year-over-year to $2.7 billion and were 47% of consolidated second-quarter revenue. Revenues from EMC's Europe, Middle East and Africa region grew 6%, revenues from EMC's Asia Pacific and Japan region increased 12%, and revenues from EMC's Latin American region grew 12%.
A number of analysts have upgraded EMC in the past few months. Craig-Hallum upgraded EMC from Hold to Buy with a price target of $30.00 from $26.00. Pacific Crest also upgraded EMC from Sector Perform to Outperform with a price target of $30.00. Finally, it was reiterated Buy with a $28 price target at Sterne Agee.
The company's profit margin has been improving (2011: 11.17%, 2012: 12.30%, 2013: 12.58%). This is a sign of a competitive company. Additionally, EMC's P/E of 20.81 is considered acceptable. Furthermore, shares of EMC are cheap going forward at 12.55. Now, Cisco (12.42), IBM (10.67) and Hewlett Packard (7.13) are all cheaper according to forward P/Es, but it is important to note that EMC dominates the trio in terms of EPS estimates for the next five years. At an estimate of 13.22%, it will grow faster than Hewlett Packard (0.00%), Cisco (9.00%), and IBM (10.59%).
From a valuation viewpoint, a PEG ratio of 1.06 is respectable given the nature of its business. The company's return on equity in the past one year has been 12.77%, higher than -40.84 for Hewlett Packard. Worth noting is that EMC's return on equity is lower than IBM (82.98%) and Cisco (17.80%). However, EMC at a debt/equity of 30.04 is more stable than Hewlett Packard (111.89) and IBM (190.81). Only Cisco at 28.61 has a lower debt/equity.
To conclude, the simple idea I'm suggesting is that you can have a peace of mind investing in a portfolio in which successful hedge managers have invested their capital. If EMS can keep meeting or beating Wall Street estimates, there is more upside to be had here. So if you are struggling with ideas on where to put your investment cash in the near future, EMC is a way to benefit on a long-term, basis.