By: Jake Mann
There are thousands of money managers who actively report 13F filings each quarter, but only a handful are active Forbes columnists and overseers of more than $1 billion in assets. Martin Sosnoff is both of these things, and his Atalanta Sosnoff Capital has been a major player in the hedge fund circuit since 1981. Because investors like Sosnoff have market-beating characteristics on an aggregate level (discover what we mean here), let's take a look at a few of the largest positions in his equity portfolio at the end of the third quarter, via a 13F filed last week.
Sosnoff's top stock pick was Google (GOOG) last quarter. The tech giant represented a $169.4 million position for the fund manager, worth 4.5% of his total equity portfolio. Google was the No. 1 pick of the hedge funds we track at the end of the second quarter (we'll have third-quarter data in about six weeks), and it's not too difficult to understand why. Google has returned a solid 23.3% year-to-date and is up more than 60% over the past three years. This has outperformed the S&P 500 handily in both periods and the stock still has value. Of its large-cap peers in the Internet information industry, Google trades at the cheapest on a cash and sales basis at 5.3 times cash and 5.2 times sales.
Equally as crucial, earnings growth over the next half-decade - analysts expect about 15% EPS growth per year - is comparable to annual growth over the last five years (19%), and there are a few reasons for this. Most importantly, Google's Android continues to dominate the smartphone platform market and its recent entry into the OEM (original equipment manufacturer) space with the Moto X is promising.
Furthermore, Google Glass is expected to increase the company's sales by 1% to 2% next year alone according to Gene Munster, and longer-term forecasts are even more encouraging. If Google can capture at least half of this market by 2016, which is expected to be over $3 billion in size assuming a price tag of $500 per device, there's upside of another 4% to 5% on top of current revenue projections. Judging by a historical multiple of about 6 times sales and a reasonable $85 billion in full-year revenue by 2016, a stock price in excess of $1,500 isn't out of the question.
From a more qualitative standpoint, Google's staple of innovative R&D projects - including, yes, self-driving cars - provides the proverbial "carrot" that can continue to capture tech investors' bullishness. In addition to Sosnoff, Stephen Mandel, Ken Fisher and George Soros are just a few of the big names who hold large Google positions, so needless to say, we'll continue to watch how they trade the stock very closely.
Boeing (BA) is the second-largest position in Martin Sosnoff's equity portfolio, just a few hundred thousand dollars smaller in size than his Google stake. The aerospace company has been a pick of Sosnoff's since the second quarter of 2005, and like Google it trades at the cheapest price-to-cash flow ratio (6.2x) of its large-cap peers. Boeing pays a modest dividend yield of 1.6%, hasn't missed a quarterly payment since 1953, and its payout ratio (20%) is about 10 percentage points below industry norms.
It's likely that Sosnoff isn't here just for the yield, though. Year-to-date Boeing stock is up 55.5% on the back of two earnings beats in FY2013 and investor sentiment has been soothed by the company's comprehensive effort to fix battery issues in its new 787 Dreamliner fleet. On the whole, sell-side analysts expect double-digit annual earnings growth to occur over the next five years, and nothing about Boeing's valuation scares us. With the company expecting the most demand over the next 20 years to be for single aisle planes in emerging markets, Boeing looks well positioned to capitalize on this trend.
JPMorgan (JPM) is Sosnoff's third-largest equity position, representing a little less than 4% of his 13F filing's total market value. The money manager first reported a stake in JPMorgan during the height of the most recent financial crisis, and shares of the banking giant have returned 23% since then. It is worth noting that Sosnoff acquired the majority of his JPMorgan in the middle to latter half of 2009, after shares had fallen under $30 a piece, so it's probable that his total return has been greater than 23%.
Like Boeing and Google, JPMorgan sports an extremely low cash flow valuation. Its multiple is second to only Citigroup (C) - which Sosnoff also holds a smaller position in - within the large-cap segment of the banking industry. By now it's clear that Sosnoff prefers cheaply valued stocks that have good growth prospects, a solid dividend yield, or a little bit of both. JPMorgan offers a dividend yield near 3% with a fairly low payout ratio near 20%, and payments have increased by over sevenfold since 2010.
Although JPMorgan doesn't quite offer the emerging markets prospects as Citigroup, Wall Street still expects earnings growth to accelerate over the next half-decade (6% annual expected average vs. 3.7% annual average over the last five years), and we don't think investors are overvaluing this potential at less than 9 times forward EPS. Most of this growth should be driven by JPMorgan's strong credit card and asset management businesses, and the market's non-reaction to a potential $11 billion fine (shares are up almost 5% since this news broke last month) is evidence of a bullish sentiment that should not be overlooked.