By Steve Morris
Investment Underground took a look at some lesser-known stocks that Soros Fund Management owns in its portfolio. The first of seven stocks going under the microscope is Exar Corporation (EXAR).
Exar has been faced with hurdles in recent years and has seen its price fall from about $60 dollars at the peak of the tech bubble to where it sits now. The recession has not helped the company find sure footing either, as the stock price has dropped almost 30% since the recession began. Exar just released their uninspiring Q4 results where net sales were only $33.8 million, compared to net sales of $35.4 million for the prior quarter and $38.5 million for Q4 of 2010.
This being said, it seems like this company has seen the roadblock and might finally be in position to push past it. This stock is poised to see better numbers in the next couple years and looks like a lucrative long term buy option. However, the company has a spotty history of generating free cash flow. Something to note is that the company does have a significant amount cash on hand (almost $4.50 per share). And along with Soros, Renaissance Technologies, another hedge fund, owns a 5.34% stake. Adding in Soros' stake, these two funds own close to 20% of the company. On a discounted cash flow basis, we estimate shares are worth upwards of $8.50 apiece, giving investors a good opportunity to buy at the price at the time of writing, $6.37, with limited downside.
A stock that could not have a more different past than Exar is Gran Tierra Energy Inc (GTE). Gran Tierra Energy is a Calgary-based energy company that began being publically traded a little before 2006 and has seen a healthy incline in growth and stock price since. The stock currently trades at $7.49, with a high trailing price to earning ratio of 52.4 and a forward P/E of 12.08. The core of their business focuses on acquisitions and oil and natural gas exploration, development and production in South America. The company operates Argentina, Peru and Colombia. The company has zero debt after paying it off in 2008 and around $355 million in cash.
Since March, shares have been weak, falling from the mid 9 range to where they sit today, due to a number of analyst downgrades. Despite weakness, the little company is still competitive across the industry on many categories like price/book and price/sales, and has strong revenue growth. If GTE can continue developing wells in emerging markets and keep growing at the current rate, we think GTE's impressive management team could produce a good ROI for investors. We estimate shares could fetch upwards of $11 on a discounted cash flow basis.
Rovi Corporation (ROVI) is another pick in Soros' portfolio. And we would bet Soros is happy that he is a shareholder. As of yesterday, the stock climbed nearly 10 dollars and saw a 20% price increase. This happened the day after the television-listings data company projected 2011 earnings above estimates. Along with being a television data company, they have their hand in many other products and industries such as search solutions embedded into consumer electronics products. The company is also involved in database business and creates copy protection tech for digital media.
This company is a mid sized competitor in the industry, and today's massive stock price surge leaves it trading at about $58.49 a share. There is great promise in the fact that they cripple the industry average in almost every category. Some of the more astounding numbers that Rovi put up were their three-year revenue growth of ten fold the industry average and their net margin percent of eight times the industry average. The only noticeable problem with this stock is that they are in similar markets and industries as the giant Apple Inc. (AAPL) However, they look to be competitive even with this industry giant and have great potential to continue posting stock price increases if their recently released projected earnings are fulfilled.
United Continental (UAL): Soros holds 788,000 shares. This is a new buy. We competitors, both established and new, as well as significant fuel price increases, will hamper this company. Although UAL can grow revenues with higher ticket prices, it hasn't been able to narrow the cost differential that exists with the low-cost airlines like Southwest (LUV). We can expect mid-margin expansion due to synergies developing. We value shares at $23 apiece, using a 12% discount rate.
The Watts Water Technologies Inc. (WTS) is the next stock we analyze. WTS yields a little over 1.2% for shareholders. The ability to dish out consistent dividends comes from the company being a big time player in the diversified industrial industry and dealing with plumbing components made to better water quality. The company's products include drains, filtration systems, backflow preventers, pressure regulators, relief valves, fittings, and pumps.
Although this industry has had a tough past couple years and the industry's revenue growth average has even been negative, WTS has seen its stock price rise during these rough times. The stock currently is trading at $36.11 and has a forward price to earning ratio of 13.2. With a steady dividend yield and rising stock prices in an industry that looks to be turning around, we think WTS is a buy.
Since we are looking at stocks that dish out quarterly dividends, it only makes sense to move on Berry Petroleum Company (BRY). BRY yield 0.6% and is a oil and gas production company. The company's reserves are spread mostly throughout California and east Texas. Berry operates three natural gas-fired electrical/steam cogeneration facilities.
With gas prices still at high and global geopolitical issues pushing likely to push them even higher, BRY's capital spending could pay off to produce a lucrative six to twelve months. Berry is currently trading at $47.63 and is sitting on top of the 52 week range.
Dendreon Corporation (DNDN) is Soros' last stock to be analyzed. Soros more than doubled his existing shares in the company in the reporting period ending 12/31, adding over four million shares to his portfolio. Dendreon Corporation is a biotechnology firm focused on the discovery, development, and commercialization of novel cancer therapies. The reason Soros Fund Management added shares is likely because the Centers for Medicare & Medicaid Services announced recently that it would support reimbursement for Provenge, the first "cancer vaccine." Provenge, an expensive prostate cancer therapy, prolongs patients' lives by a median of four months, and was deemed to be superior enough to existing alternatives that Medicare decided to pay $93,000 for each course of the therapy.
The drug already looked like a potential blockbuster, but the recent news only increases its potential market and likelihood of becoming a moneymaking machine. The drug faces one last regulatory hurdle, but is expected to pass it this summer. Expect larger pharmaceutical companies to come sniffing around once it does.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.