On Thursday we published the first part of Larry Robbins’ favorite stock picks. Glenview Capital returned 301% after fees and expenses between January 2001 and December 2010. Glenview also returned 15.7% in 2010, performing better than average hedge funds and the S&P 500 index. Larry Robbins is extremely optimistic about the market over the next 3 years. He thinks the following stocks will increase by 50-100% during this time period:
Laboratory Corporation (LH): Robbins believes the base business of LH is pretty defensive and the stock benefits from economies of scale. "LabCorp’s purchase of the testing business of Genzyme will be meaningfully earnings and value accretive beginning in 2012. Additionally, LabCorp recently received anti-trust approval to complete their accretive acquisition of Westcliffe Medical Labs, so they will also benefit from this earnings accretion beginning later this year," Robbins says. He thinks this is the bottom of the economic cycle for lab testing, and the demand will pick up soon.
Viacom (VIA.B): "We like the stability and growth of cable networks based upon the growing and recurring nature of affiliate fees, and we are in the recovery phase of ad spending coming off of the 08/09 recessionary pullback… the business remains highly cash generative with free cash flow equal to approximately 110% of net income," Robbins says. Glenview likes Viacom because of its share buybacks. Robbins believes that’s the best way for Viacom to deploy its excess capital.
Goodrich (GR): Robbins thinks Goodrich is on the cusp of a meaningful increase in demand for its products. The aging airplane fleets help GR which is a provider of engine components and aftermarket services. As the planes age, the regulations require mandatory inspections and maintenance. Glenview expects a 17% annual growth rate for GR until the end of 2014. GR is one of Robbins’ longer term investments. Stephen Mandel’s Lone Pine, Lee Ainslie’s Maverick, and Bill Miller had bigger positions in GR than Glenview at the end of December.
Expedia (EXPE): On Thursday Expedia announced to split into two companies. Larry Robbins predicted this in his investor letter. He thinks the stock has healthy organic revenue and profit growth, free cash flow is greater than its earnings, and it has the ability to maintain profitability in a downturn. Here is what Robbins said about Expedia:
"Their TripAdvisor business is growing rapidly but may benefit from faster growth post 2011 as an independent company, generating additional ad growth from other non-Expedia online travel sites. We believe the sum of the parts of Expedia is well in excess of a 50% premium to current trading prices. Management and the board have acted before, making significant share repurchases at meaningfully higher valuations. We believe they will likely improve upon past history by adding to repurchase activity, but at meaningfully more attractive prices.
The stock is exceedingly cheap, trading at 8x forward recurring free cash flow and 6x backing out the TripAdvisor stake. We believe that shareholders, management and the board are likely highly aligned to capitalize on opportunities to create value at Expedia."
Tyco (TYC): Robbins believes in Tyco’s management because they executed pretty well over the past five years. He thinks TYC will increase its margins and also create synergies from its recently announced acquisitions. Tyco trades at 11 times Glenview’s 2012 earnings estimate and Robbins think TYC will appreciate meaningfully over the next three years.
Aon Corp (AON): Robbins expects AON to repurchases $550 Million of stock in 2011. He believes Japanese earthquake will help the insurance rates go up, increasing the revenue for AON. Robbins thinks the stock will appreciate by 25-45% by the end of 2012. AON is very popular among prominent hedge funds. There were 16 hedge funds with at least $5 Million invested in AON at the end of December. Southeastern Asset Management had a $588 Million position in AON at the end of December. Boykin Curry’s Eagle Capital had nearly $400 Million in AON.
Clearwire (CLWR): Robbins calculated that Clearwire spent $20 Billion on its 4G wireless network and its current enterprise value is only $12 Billion. Analysts estimate the mobile traffic to grow by 4000% over the next four years. Robbins believes Clearwire has significant downside protection, the capex spending is behind them, and the wireless industry is about to experience a boom in demand for spectrum. Robbins expects CLWR to double over the next four years. If he is right, Phil Falcone’s wireless adventure will net him billions as well.
Pfizer (PFE): Robbins expects Pfizer to spin off several of its businesses in 2011. He also expects Pfizer to spend $10 Billion annually in share buybacks. "This capital allocation, along with an increased dividend payout ratio to 40%, will likely generate high single digit earnings growth and a 4-5% dividend yield over the intermediate term. By 2015, we expect Pfizer to demonstrate mid-single digit revenue growth with earnings growth in the low to mid-teens, commanding a 13-15x multiple in the out years. At 8.5x 2012 trough earnings, we believe Pfizer is poised to deliver a significant total return to shareholders over the coming three to five years" he says.
Pfizer is the most popular healthcare stock among hedge funds. Nearly 150 hedge funds own 3% of the outstanding shares of Pfizer. Hedge fund stars like Lee Ainslie, David Einhorn, David Tepper, and Curtis Schenker all own PFE in their portfolio. Bridger’s Roberto Mignone sold all his Pfizer holdings during the fourth quarter.
