2-Century-Old Investment Firm Loves Tech

Includes: CNQ, CSCO, GG, MSFT
by: Activist Stocks

It's that time again, 13F filings. There's nothing like spending an afternoon pouring over 13Fs to spot some trends and source some ideas. And so we embark on our quarterly run through of 13Fs by managers we have a special affinity for. First up is First Eagle Investment Management. Ten scores and a decade ago, First Eagle was founded. This 200 plus year old investment firm manages over $80 billion.

The firm, headed by France-born Jean-Marie Eveillard, takes a global, long-term perspective when making investments. Thus, when browsing 13Fs, First Eagle is always a solid choice for finding some long-term investment choices.

The big standout?

Atop First Eagle's portfolio is two tech titans. Number one is Cisco (NASDAQ:CSCO) and number two Microsoft (NASDAQ:MSFT), making up 3.18% and 3.15% of the firm's 13F portfolio, respectively. This is up from the end of 1Q, when Cisco was its second largest holding and Microsoft was its fourth.

It's no secret that CEO Steve Ballmer is out, with investors taking the news as a resounding positive and driving the stock up 7% last week. The announcement is just another confirmation that Microsoft is without a doubt a tech giant in transition, with the stock being in a lull for the last decade, having traded relatively flat prior going into August.

Activist hedge fund, ValueAct Capital, has taken notice of this lull and gotten active in the stock. At the end of 2Q, the fund owned 53 million shares, and it's the fund's largest stock holding, accounting for over 10% of its public equity capital. ValueAct has been pushing for a board seat and is looking to enact a succession plan for the company.

Microsoft's real issue is the well-discussed exposure to the declining PC market. There is hope for the Microsoft bulls, however, where Microsoft hopes that recently announced restructuring might right the ship, but I'm not looking for this to materialize for at least a couple years.

As a long-term value play, MSFT might be an opportunity. The stock trades at 11.5 forward earnings, compared to its five-year average of around 12.5x. Not that great of a discount; however, prior to the financial crisis it wasn't uncommon to see MSFT trading at 25x to 30x. Again, it'll be half a decade before we see multiples like that, as MSFT has a lot to prove.

Assuming they come through "restructuring" a better tech company, it could well trade at 25x earnings in fiscal 2019. Based on analysts' long-term EPS growth rate, EPS could come in at $4.15 for 2019. Putting MSFT"s price target at $100. What this means is 185% upside over five years. Not too bad.

A lot of "ifs" and "buts" lie between now and then though. Mobile is huge, and MSFT has been fiercely trying to break into the market, but to no real avail. The company's partnership with Nokia to bring Windows 8 Mobile OS to the masses has been less than stellar, and the recent markdown of its tablets signals another struggle to gain traction in the mobile market.

I think there are a lot of other tech giants that provide similar upside with higher margins of safety. But I'd be remiss if I failed to mention that MSFT is willing to pay you a 2.8% dividend yield while you wait.

Software tech

First Eagle's other tech pick is out of the hardware segment and more in the networking/software space, Cisco. The company is the largest and most dominant player in the networking space. One of the nice things is that Cisco has a stranglehold on the market and has for some time.

The balance sheet is ironclad. Over $40 billion in cash/ST investments and a debt to capital ratio of around 20%, which allows the company to continuously reward shareholders. Its market cap is over 30% covered by cash, and it pays a 2.85% dividend yield; it's hard to see how you'd lose money investing in Cisco.

But the Mr. Market is a strange being and can be a tough judge of character. Over the last five years, the stock is basically flat, and analysts are not hopeful for upcoming EPS growth, with analysts projecting a mere 8% CAGR for EPS over the next five years. However, the one bright spot is that Cisco plans to lay off 4,000 employees -- which is 5% of its global workforce. This could help boost margins over the interim and help with EPS growth.

The infamous oil sands

A couple of other notable stock picks that stood out to me included a 119% increase in Canadian Natural Resource (NYSE:CNQ) shares owned, now making up the firm's 10th largest holding and 2.26% of its 13F portfolio. Canadian is an oil and gas exploration and production company.

CNQ is the major player in the oil sands boom. It's arguable as to the greatness or disaster that oil sands are, noted here and here. However, it also has midstream activities and pipeline operations. CNQ does pay out a 1.6% dividend yield.

CNQ is the 2nd largest producer of natural gas in Western Canada and one of the largest heavy crude oil producers in Canada. The company has about 50% of its 2013 production hedged, leaving some exposure to the open markets, with the lowest possible realized price for its hedged position at $80 per barrel. With its Horizon Oil Sands Project in full swing, about 70% of CNQ's production is oil, with the other 30% gas.

Trading at 25x earnings, CNQ isn't the cheapest energy stock out there, but it is one of the best if you're part of the oil sands movement. But with analysts projecting 20%+ EPS growth over the next five years, the growth at a reasonable price story might still be intact -- where the PEG is around 1.3.

I love gold!

While most have found a reason or two to hate gold over the past few months, First Eagle upped its shares owned in Goldcorp (NYSE:GG) by 72%. The gold producer is now the fund's 7th largest holding. Despite being down nearly 35% for the first half of the year, Goldcorp has rebounded nicely over the past month, now down only 14% year to date.

The miner has operations spread across South America, Mexico, Canada and the U.S. The company remains the undisputed leader when it comes to producing gold. Goldcorp even plans to up that production by 70% over the next five years to 4 million ounces. Thus, why own Goldcorp?

Goldcorp, like most miners, depends on the price of gold. A 1% move, up or down, results in a roughly $40 million move in earnings for GG. For those betting on a long-term rise in gold prices Goldcorp is sure to be an industry tops bet. GG is one of the most leveraged to gold prices, being 100% un-hedged. Not to mention, it's one of the lowest cost operators.

All in all

The big standout investments for First Eagle that jumped out to me are their strong belief in tech, namely the mega turnaround story of MSFT. I have my reserves about the stock. Meanwhile, its other major tech bet, Cisco, is also having a tough time growing.

Canadian Natural is a leader in the "interesting" oil sands market; however, it does have a portfolio that includes other conventional resources, with all its resources being in the relatively "safe" G8 countries. Meanwhile, the sharp pullback made a number of the gold miners value plays. First Eagle took notice and made, what should be considered, a long-term bet on the gold markets with Goldcorp.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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