While George Soros is not likely in the day-to-day operations of Soros Fund Management anymore, his two sons seem to have a knack for investing as well. Here's a look at nine stocks the hedge fund has purchased over the past four months.
Google (GOOG) Soros added shares at the average price of $603.21 during the most recent reporting period. An improving global economy, penetration into new markets, and expansion into other markets are all factors that provide robust and sustained growth in the online advertising revenues for Google.
Moreover, according to S&P, U.S. online advertising revenues increased by 3% in 2009, and 15% in 2010, and forecasts are for growth of 10% in 2011. S&P believes that the U.S. accounts for a third of the online advertising market. Google is also seeking to cast a wide net in the mobile Internet arena, which provides another driver of growth as more Internet-ready phones come into use. A catalyst pointed out by Credit Suisse is that non-GAAP EBIT margins as a percent of net revenues can stabilize at pre-recession levels of around 50% in 2012 and beyond. This provides an added source of EPS growth.
Google also can take advantage of Yahoo's (YHOO) adverse revenue situation. In Q1 2010, revenues ex-traffic acquisition costs dropped by 6% to $1.064 B. For Q2 2011, Yahoo expects revenues ex-TAC to be in the range of $1.075 B to $1.125 B. In Q1 2010, that actual figure was $1.13 B. In 2010, revenues ex-TAC fell by 2.01% to $4.588 B. For 2011, the Street expects revenues ex-TAC to increase slightly to $4.7 B (+2.44%). According to comScore (SCOR), Yahoo has only 15.9% of the U.S. search market compared with Google's 65.4%.
We find GOOG shares to be cheap anywhere under $550 apiece.
Amazon (AMZN): Soros added shares at the average price of $176 per share during the recent reporting period. AMZN is an online retailer that operates both in North America and internationally. AMZN also offers programs that enable sellers to sell their products on its Web sites, and their own branded Web sites.
While AMZN has come to dominate the online retail industry over the past few years, they are starting to face increased competition from brick-and-mortar retailers who are struggling to maintain internet sales revenue from the increasingly lucrative online shopper. AMZN's operating margin of 3.66% is already among the lowest in the industry, and given AMZN's inability to provide the kinds of in-store services alternatives for customers that brick-and-mortar stores offer, AMZN could be poised to decline even further in 2011. AMZN is currently trading at a 80+ P/E multiple, exceeding our fair value estimate.
Around $190 per share, AMZN shares are fully priced.
Verizon (VZ): Soros added shares as the average price of $37 during the recent reporting period. Verizon has increased its dividend payouts for just 6 straight years. The current yield of 5.5% is well above average, but has only been growing at just under 4% for the last 5 years. A quick check of the clearly unsustainable 213% payout ratio and investors should show great caution. Although to be fair it had been in line in the past. With the averages, it would take VZ about 5 more years than ATT (T) to reach the same 11.2% yield.
We think shares are attractively valued around $35 apiece.
Halliburton (HAL): Soros increased his holdings in Halliburton during the most recent reporting period at the average price of around $44 per share.
Halliburton provides products and services for energy development, exploration and production. The company currently sports a beta of 1.57, and Halliburton's profit and operating margins stand at 10.2% and 16.7%. While we like Halliburton's prospects, especially outside North America, and the oil and gas industry in general, we think investors should wait for a further dip in oil prices before purchasing shares of Halliburton.
At the time of writing, we believe the market is fairly valuing the company. However, we advise adding shares in the low $40s range or using a put-selling strategy to acquire shares due to ample premiums.
The main risks we see are twofold: political and commodity price driven. The company is well diversified outside the North American market. However, it is present in politically unstable regions such as Libya (where the company is already being affected by recent sanctions) and Venezuela. We think these risks are mostly mitigated by proper geographic diversification into markets like Brazil, Mexico and Russia.
Citi (C): Soros added to his large position in Citigroup during the most recent reporting period. The banking giant, with a market cap of $110B, seems to finally be pulling out of the financial crisis. Earnings were once again positive in 2010, and are expected to grow a good amount in the next few years. Citi is trading at a low price/book ratio, despite the renewed earnings and solid 15.22% operating margin. The company recently reinstated a dividend of 1 cent per share, a mostly symbolic gesture to show that the company's financial conditions are improving. Analysts expect the dividend to be raised to a more significant amount by 2012. One of the biggest American banks, Citi is well diversified globally, with operations around the world. With its extensive resources, it should be able to position itself for success down the road. Guru investor Bill Ackman is also a shareholder.
Still churning high volume, shares are fairly valued around $40 apiece.
Gilead Sciences (GILD): Soros added shares at the average price of $39.2 during the recent reporting period. Gilead made $7.94 billion in net sales and $2.9 billion in profits in 2010. These are respective increases of 13.3% and 10%. In 2009, the same figures were 31.4% and 31.06%, respectively. EPS was at $3.31, which implies a P/E of 11.7. The 30 day put/call ratio is around 0.7.
On February 22, the company announced that it would acquire Calistoga Pharmaceuticals for $375 million. Calistoga has a portfolio of proprietary compounds that selectively target isoforms of phosphoinositide-3 kinase (PI3K). This pathway has demonstrated to be a central signaling pathway for cellular proliferation, survival and trafficking. Calistoga's lead product candidate is CAL-101, which is a first-in-class specific inhibitor of the PI3K delta isoform. PI3K delta is preferentially expressed in leukocytes involved in a variety of inflammatory and autoimmune diseases and hematological cancers. CAL-101 is in Phase II studies as a single agent in patients with refractory indolent non-Hodgkin's lymphoma, and in combination with rituximab in treatment-naïve elderly patients with chronic lymphocytic leukemia. Also, Calistoga's product development pipeline includes other selective PI3K inhibitors that are in preclinical development, and may have application in both oncology and inflammatory diseases.
GILD shares are fairly valued around $41 apiece.
Exar Corporation (EXAR): Soros has steadily been accumulating shares of Exar since 2009. The fund most recently added in the reporting period ending 5/10. Exar operates in an interesting niche. Rather than actually manufacture semiconductors, the company simply designs them. Most recently, Soros Fund Management announced adding shares in January, February, March and April of 2011, somewhere in the $5.96-6.37 price range.
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, $6.25. However, the company does trade on high forward P/E and 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 $5.00 per share). And along with Soros, Renaissance Technologies, another hedge fund, owns a 5.34% stake. Adding in Soros' stake, these two funds own nearly 20% of the company.
We think its likely that these smart money investors are building up a large position to influence management to sell the company. At the time of writing, investors have limited downside in EXAR shares, in our opinion.
Baidu Inc. (BIDU) Soros added shares at the average price of $117.59 during the reporting period. Baidu had a stellar first quarter this year. BIDU announced that it had more than doubled first-quarter profits from 480.5 million yuan to 1.07 billion yuan. In the same quarter, revenue rose 88%. Baidu can continue this success with the help of a continual shift towards online advertising.
BIDU has a PEG ratio of 0.96 and a revenue growth of 20.6. It also has an operating margin of 51% and an EPS growth of 77.3. Google pulled out of China in March 2010 and has left a lot of market share for Baidu to grab. Baidu is a growth stock and with its customer base expanding from the Google void, expect growth in the future.
Petroleo Brasileiro (PBR): Soros added to his relatively small position during the reporting period. This massive Brazilian producer has been boosted recently by the major discovery of reserves off the Brazilian coast. This type of extraction is more costly than traditional extraction, so, as prices for oil rise, the justification and margin on this type of extraction grows. That means that investors are aware that the benefits of the reserves will be elongated over a period of time so momentary shakes to the oil market can have less of an effect on the stock.
PBR shares are undervalued below $35 apiece, and interested buyers should take a look given the company's solid growth prospects going forward.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.