Top Picks by Super Investor Wilbur Ross

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 |  Includes: AGO, HBI, INVA, KEG, USO, VLTC, XCO
by: Investment Underground

By Nico Gayle

Graham and Dodd-educated super investor Wilbur Ross did very well in 2010, squeezing value out of a fund that is highly concentrated in only a few stocks. Investment Underground took a look at some of Ross’ (nicknamed "the Albatross") notable recent buys and large holdings:

Hanesbrands (NYSE:HBI): Hanes, the popular apparel producer, was a new Ross buy in the final quarter of 2010. Although it only accounts for about 0.46% of his total portfolio, it is one of the top 15 holdings in his highly concentrated fund. Hanes is a leading brand in mass apparel, but is somewhat dependant on large retailers like Wal-Mart (NYSE:WMT). It is one of the mainstays of the apparel industry, and as long as people keep wearing clothes, we cannot see any huge declines in revenue. One factor to consider with HBI is the price of cotton, and the related trade negotiations with countries like China. Unfortunately for HBI, cotton prices have been rising, and the firm is looking into alternative fabrics for its clothes. These are crucial factors to monitor when considering HBI.

The company is coming off strong earnings in 2010, and is valued at a low P/E of 13.38. Its ROE in 2010 was also strong, at over 47%. Over the long run, an increased population means increased demand for clothes, and Hanes is in a good position to benefit. We think it will be difficult for Hanes to keep improving margins, but we also believe the firm will be a steady performer as long as the economy doesn’t tank. The valuation is attractive as long as the firm doesn’t build up any more debt.

Theravance (THRX): Another new buy, THRX only accounts for .13% of the Ross portfolio. On May 3, GlaxoSmithKline (NYSE:GSK) invested $6.7M in THRX, at $25.60 per share. GSK now owns around 19% of Theravance’s outstanding capital stock. THRX is a biopharmaceutical company with a market cap of $2.29B, and recently received approval for its Vibativ drug. The firm has not had positive earnings yet, but should turn that around in the next few years because of the Vibativ approval. The company has several other drugs in late stages of testing and approval, giving it further growth potential. Theravance also has very little debt. Nonetheless, we don’t like this stock a whole lot on its own. It is tough to value a company yet to sell a product, and concerns still exist over Vibativ, both in terms of health risks and market viability. While other developmental drugs may be promising, they are far from safe bets, and the company may never generate significant profits to justify the current stock price. In our view, the best chance for Theravance to appreciate is a full takeover by GSK or another industry competitor, and while entirely possible, we are not confident enough that this will happen to recommend THRX as a buy.

Motricity (MOTR): Motricity is a smaller firm, with a market cap of $694M, and provides mobile data solutions to cellular carriers so they can provide content specific to their users. This is another new buy in Q4 of 2010 for Ross, but accounts for a very small portion of his total portfolio. MOTR is a new stock, holding its IPO in June of 2010. Although the firm had negative earnings last year, revenue grew at a substantial rate, and the firm has no debt. MOTR is a young, and therefore risky company, but with smartphone use growing, marketers are turning more and more toward personalized cellular content like that provided by Motricity. The stock has been very volatile, which is not surprising given its youth, and after reporting lower than expected revenue in Q1, was hit pretty hard. Also partially due to huge selloffs by its underwriter, MOTR is down 37% year-to-date after huge gains in 2010. Nonetheless, Q1 revenue still grew 11% year over year, and Motricity is in a very high growth sector. We think that the recent selloff was a one-time cashing in, and that the company’s high growth will lead the stock to big gains.

EXCO Resources (NYSE:XCO): We mentioned earlier that Ross’ portfolio is highly concentrated in a few stocks, and this is the best example. After first buying XCO stock in Q3 of 2010, Ross upped his shares by 752% in Q4, bringing it up to 35% of his total portfolio, the heaviest weighting of any stock. XCO is an oil and gas exploration company with a market cap of $4.4B. The vast majority (97%) of its production is in natural gas, and the stock offers a 0.79% dividend. Despite low gas prices, the CEO recently reaffirmed that EXCO will stick to its traditional strength in drilling natural gas, instead of following the lead of many gas producers in efforts to take advantage of high oil prices. Trading at a P/E of 6.7, its financials in 2010 were very strong, with a strong balance sheet and ROE of 55%. XCO has also been the subject of acquisition rumors, some started by its own management. With many energy experts predicting natural gas to be America’s energy source of the future, we like XCO over the long run. Even though natural gas prices are down, we think this presents a good chance to buy low, with hopes that increased demand will increase natural gas prices in the future, or that EXCO will be taken over.

Key Energy Services (NYSE:KEG): Key Energy is a well services company with a market cap of $2.2B. The stock accounts for just less than 1% of Ross’ portfolio. KEG is trading at a forward P/E of 15.1, with estimates of strong growth in the next couple of years. The stock has done very well lately, up over 19% in 2011, after a 48% increase in 2010. The company recently announced Q1 2011 earnings, which were negative due to a debt refinancing, but exceeded analyst expectations when excluding this refinancing. Revenue grew by double-digits from last year, and the firm issued a favorable outlook for 2011.

Key Energy works mainly with onshore wells, and has a couple of factors in its favor. With trouble brewing in the Middle East, the US is facing even more pressure to free itself from foreign oil, and in the wake of the BP offshore oil spill, onshore wells are the safest option. Onshore oil and gas is also becoming more accessible due to new technologies like hydraulic fracturing. These factors, along with the rising price of oil, should lead to more wells and drilling activity, boosting KEG’s business. Because of these prospects, we think KEG is an attractive growth stock.

Assured Guaranty (NYSE:AGO): Ross’ second largest holding, AGO accounts for about 33% of the total portfolio. The firm offers financial insurance on bonds and other products, and as you might expect, was slammed by the financial crisis. Unfortunately for Ross, he bought in right as the stock started plummeting in 2008, although he did add more shares near the bottom. Nonetheless, AGO has bounced back, and its 2010 EPS grew 286%, up to $2.90. In the last month, AGO reached an agreement with Bank of America (NYSE:BAC) over its claims dealing with non-complying mortgages. Under the agreement, BAC will make a $1.1B cash payment to Assured Guaranty. AGO is trading at low valuation measures, at a P/E of 5.9, and a price/book of .8. In the end, we have mixed feelings on AGO. On one hand, it is one of the biggest insurers around, has been a leading performer, and presents a seemingly low valuation. On the other hand, AGO is still exposed to risky loans with high chances of default, and its business depends heavily on the ratings it receives from rating agencies that are still wary of the post-crisis bond market.

U.S. Oil Fund (NYSEARCA:USO): This ETF attempts to track the price of WTI oil, and accounts for 0.36% of Ross’ portfolio. The price of oil has come back down some, but is still high, so this one has paid off recently. We think oil will rise back up to its high levels of the last few months, and possibly even higher and USO is a good pick for those looking to get some basic exposure to the price of oil. If you agree with Goldman Sachs, who predicted the current retreat in oil prices and has predicted another rise in the near future, then USO is a good pick for you.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.