There's no shame in riding the coattails of successful hedge fund managers so long as investors realize that hedge fund ownership is only one factor in the investment process. It is not enough to invest in a company solely because of institutional ownership, but at the same time it would be foolish to ignore the portfolio activity of managers that have a proven track record of success.
Here are some important global stocks with notable shareholders:
Baidu, Inc (BIDU)
Notable Shareholder: Viking Global Investors LP
The Chinese and Japanese language internet search business has a market capitalization of around $45 billion. They trade with a trailing P/E of 71.5 and a forward P/E of 32.7. The search business is highly profitable. In 2010, BIDU made $534 million on $1.2 billion of revenues, a 44% profit margin. Sales growth has also been very strong. In 2007 and 2008, the company's revenues roughly doubled each year. While the growth rate slowed to around 40% during 2009 because of global financial crisis, sales in 2010 returned to trend by growing around 80%.
According to Alexa, Baidu.com is the sixth most visited website on internet, ahead of popular sites such as Wikipedia, LinkedIn, MSN and Amazon.com. While Baidu.com currently enjoys a structural advantage over Google in China, the two companies present investors with an interesting comparison. Baidu has the advantage of being embedded in China and better positioned to benefit from Chinese growth, but at a price/sales of 33.7 compared to Google's price/sales ratio of 5.43, Google Inc starts to look very reasonable.
Youku.com Inc (YOKU)
Notable Shareholders: Capital Research Global Investors, Davis Selected Advisors, Tremblant Capital and Tiger Global Management
The company operates an internet video portal for amateur and professional content. Founded in 2005, the Beijing based company is frequently referred to as the "Chinese YouTube." The company's shareholders read like a who's who of the financial world. Most impressive is the inclusion of funds like Capital Research Global Investors and Davis Selected Advisors. Davis' ownership of the stock is perhaps most surprising since Davis has a renowned reputation for their value investing orientation.
The company faces tremendous growth opportunities. While they already have an impressive following of 231 million month unique visitors from home in March 2011, there is still substantial potential for additional market growth and penetration. There are also risks. For example, according to management, license fees for professional television serial drama content increased in 2009 by 200% and by more than 100% in 2010. Movies license fees have also experienced price increases. They rose 90% in 2010.
Youku.com has drawn criticism from bears because of high nominal valuation ratios. Bears commonly complain that the Chinese company's market capitalization of $4.75 billion is already well in excess of the $1.65 billion that Google paid for YouTube. This puts the company's trailing price/sales ratio at 80.99 based on 2010 revenues of $58.65 million. Revenues grew 365% in 2009 and 152% in 2010. In the quarter ended March 31, 2011, revenues grew 163% from the year ago quarter. Despite the strong revenue growth and impressive potential, the company is still reporting losses. In 2010, the company reported a $31.01 million net loss, a 26% improvement from the previous year's loss.
MercadoLibre, Inc (MELI)
Notable Shareholders: Tiger Global Management LLC and TPG-Axon Capital Management
MercadoLibre operates the largest online commerce platform in Latin America. They have large market share in Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Uruguay and Venezuela. According to Alexa.com, MercadoLibre.com has strong regional ranks in their major markets: Venezuela: 22th, Uruguay: 27th, Argentina: 32nd, Ecuador: 43rd, Colombia: 54th and Mexico: 61st. Though these statistics underestimate the company's reach because of various website access points for users. For example, while the main website has a traffic rank of 61st, mercadolibre.com.mx has a traffic rank of 12th in Mexico.
The company trades at rich valuations that reflect the investor enthusiasm you might expect from a company with great upside. MELI has a trailing P/E of 63.5, a forward P/E of 39.7 and a price/sales of 16.8. With profit margins north of 25%, a PEG ratio of 1.52 and secular growth opportunities, the company is worth additional due diligence, but investors will probably want to wait for a better entry point before they initiate a position. In 2011 alone, the stock rose from around $66 to more than $90.
Yahoo! Inc (YHOO)
Notable Shareholders: Canyon Capital, Greenlight Capital, Icahn & Associates and Capital Research Global Investors
In the fast paced technology world, Yahoo! Inc is a living relic of a bygone era, yet it is still a hot hedge fund commodity because of their global assets. Yahoo.com is still the world's forth most popular website in the world, but the company's value now resides largely in their 35% stake in Yahoo! Japan and their 40% stake in Alibaba.
During the financial crisis, YHOO traded below $10. The stock has since rebounded in large part because of growing interest from hedge fund interest. In their latest shareholder letter, Greenlight Capital highlighted their new position in Yahoo!, which they purchased at an average cost of $16.93. Greenlight believes there is a possibility that YHOO's Alibaba Group stake is "ultimately worth YHOO's entire current market value."
Just based on a simple snapshot of financials, Yahoo is not a cheap stock. With a trailing P/E of 18.91 and a forward P/E of 17.7, these valuations are high for a fading technology company that has largely driven free cash flow growth through cost cuts. But of course, these metrics do not incorporate the market value of Asian assets that could currently demand a premium valuation. Yahoo's US assets are so depressed that they are leveraged to even modest improvements, but the company is predominately a global play. If Alibaba and Yahoo! Japan face multiple contraction, YHOO shareholders go see meaningful downside.
Sohu.com Inc (SOHU)
Notable Shareholders: Renaissance Technologies LLC and Blue Ridge Capital
Sohu.com Inc is a Beijing based internet company. According to Alexa, Sohu.com ranks 9th among websites in China.
Sohu.com sports a trailing P/E of 20, a forward P/E of 14 and a price/sales of 4.8. Revenues grew 29% in 2009 and 19% in 2010. In the most recent quarter ending March 31, 2011, revenues grew 35% because of increases in online advertising and online gaming. Operating margins remained stable at 37%.
Sina Corp (SINA)
Notable Shareholder: Baillie Gifford and Company
According to Alexa, Sina.com.cn is a top 3 site in China. The Shanghai based internet company is often called the "Twitter of China" because of growing popularity of their Weibo service. Weibo had 140 million users by April, putting it in the same ballpark as Twitter. While some may assume that Weibo's success is due to structural advantages because it is a Chinese company, SINA bulls point out that Weibo is a superior user experience that allows photos and videos.
The company's stock price dropped in the days following the most recent earnings release. While the the profit decline was attributable to increased expenditures to build out Weibo and other social networking assets, the real disappointment was because of lower than expected second-quarter sales of $112 to $115 million compared with $118 million average forecasts. SINA sports a forward P/E of 55.13, a price/sales of 17.5 and a price/book of 5.4.
While SINA is clearly pricey based on trailing fundamentals, the company's earnings don't reflect the business' fundamental importance and opportunities. SINA has not fully monetized their Weibo business. If nothing else, SINA appears to be an attractive relative value play based on the valuations being floated for Twitter (Twitter may have walked away from an $8 to $10 billion valuation). But investors should remain cautious. Relative valuation works if you trust the benchmark. While we think investors should continue to monitor this exciting space, especially if there are further developments at Twitter, they should probably hope for better prices and more reasonable valuations.