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Summary: Driehaus Capital Management headed by Richard Driehaus has over $4 billion in assets, including $2.4 billion in U.S. equity assets. It offers mutual funds and manages money for institutional clients. The firm has returned an outstanding 18%-22% average annual return in its largest equity mutual funds over the last eight to 10 years. Their investment philosophy is based on company specific earnings growth as being the driver for stock prices over the long-term. Two attractive buys from the Driehaus portfolio include fiber optic laser manufacturer IPG Photonics Corp. (IPGP), automotive products manufacturer TRW Automotive Holdings (TRW) and Brazilian energy company Petroleo Brasileiro (PBR). Furthermore, Israeli internet security software provider Check Point Software Technology (CHKP) is a top sell from their portfolio.

Chicago-based mutual fund Driehaus Capital Management, headed by Richard Driehaus, manages over $4 billion in assets, including $2.4 billion in U.S. equity assets. They manage 11 equity and fixed income strategies for their mutual funds and for the money they manage on behalf of institutional clients. Their flagship U.S. equity mutual fund, the Driehaus Emerging Markets Growth Fund with $850 million in assets, has returned 18.2% average annual returns in the last 10 years. Their second largest equity mutual fund, Driehaus International Small Cap Growth Fund with $300 million in assets, has returned 22.3% since fund inception in 2002. The cornerstone of the firm's investment philosophy is that company specific earnings growth is the fundamental driver of company specific stock prices over the long-term and they seek to exploit specific market anomalies and inefficiencies using a bottom-up fundamental approach while also factoring in the top-down macroeconomic environment.

The fund holds a diversified portfolio of 540 positions, with almost half of their holdings in small-caps, another third in mid-caps and the remaining 20% in large-caps. Its portfolio turnover is around 120%, implying an average holding period of 10 months. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that the portfolio is over-weight technology (28%) and service (17%) sectors and it is under-weight energy (8%) and finance (7%) sectors, expressed as a percent of its portfolio in these sectors versus the average sector weight for the market.

The following summarizes its largest new buys and sells in the latest reported 13-F filing for the March 2011 quarter , and updated based on any 13-G filings since the end of the quarter:

  • Technology Sector: Buy IPG Photonics Corp. and Sell Check Point Software Technology. Driehaus added $47 million to their $581 million position in the technology sector, including selling $17 million out of a $23 million position in Check Point Software Technology, an Israeli provider of internet security software, hardware and services. The CHKP position was opened in the mid-$20s in the summer of 2008, so the fund selling in the $50s last quarter was profit-taking. The stock is currently trading at a forward price-to-earnings (P/E) ratio of 20, near the top of its historical P/E range, and it has tripled since the lows in the fall of 2008 while earnings are up only about 40%. Furthermore, analyst targets are in the $50-$60, and technically the stock may be forming a double-top after the huge triple run since late 2008. The fund also opened a new position in Cirrus Logic (CRUS) probably in the low-$20s, and they are down more than a third on this position already since then, so there is not much informative value in their buying CRUS. Furthermore, the fund s second largest holding at $34 million is in IPG Photonics Corp., a manufacturer of fiber optic lasers, amplifiers used in materials processing, telecom, medical, and measurement markets. The position was opened in the $20 range in summer of 2010 and with the stock trading in the high-$50s, they added another $3 million to their prior quarter $31 million position instead of taking some profit off the table, thus indicating their high degree of conviction in this buy. The stock continues to beat estimates and guide higher, and for the current fiscal year ending December 2011, earnings are projected to double to $2.23 over the prior year with also strong revenue growth, and the stock is trading at 35 forward P/E. This is an attractive buy that can be accumulated if it corrects below $55-$60. Also, the fund added $22 million to their prior $3 million in Chinese internet search services provider Baidu Inc. (BIDU). The stock is trading at a rich P/E of over 45 while analyst targets in the $150 range indicate that there is not much upside in the short-term.
  • Consumer cyclical sector: Buy TRW Automotive. Driehaus sold out of their $27 million position in Tenneco Inc. (TEN), a manufacturer of automotive emissions and ride control products for OEMs and after-markets, and they added a new $23 million position in TRW Automotive Holdings, a manufacturer of active and passive safety related products for automotive OEMs. TRW currently trades at an attractive forward P/E of 7 near the low-end of its historic P/E range. It beat both revenues and earnings in the prior quarter and is expected to continue to grow in the double-digits going forward. Also, analyst targets are in the $60-$70 range, so it is an attractive buy at these levels. The position in TEN was opened in high-teens in late 2009, so the selling out in the $40s is profit-taking and the stock continues to be attractive even at these levels.
  • Industrial sector: Driehaus added $22 million to their prior quarter $32 million position in the sector, adding a new $21 million position in Robbins & Myers Inc. (RBN), a manufacturer of engineering equipment and systems for various applications in energy, industrial, chemical and pharmaceutical markets worldwide. The stock trades at a forward P/E of 19 based on fiscal year August 2011 earnings, near the top-end of its historic P/E range, and it is up 200% from just two years ago, so the upside may be limited.
  • Energy sector: Buy Petroleo Brasileiro. Driehaus sold out of their $22 million position in Northern Oil & Gas Inc. (NOG) and they sold $21 out of their $38 million position in Brigham Exploration Co. (BEXP). The position in NOG was opened in the $10 range in late 2009 and the position in BEXP was opened in the $5 range in mid-2009, so the fund selling out of NOG in the $30s and selling most of BEXP in the $30s last quarter was profit-taking and both stocks have corrected severely since. Also, the firm added $13 million to their prior $22 million position in Petroleo Brasileiro, a Brazilian company engaged in the exploration, production, supply and distribution of oil and gas in Brazil and abroad. The position was opened in the low-teens in mid-2005 so the fund adding more in the $40 range is a huge conviction buy. The stock is trading at a reasonable 8 P/E, and is an attractive buy at these levels.

Table

Company

Ticker

Action

Market Value at end of March 2011 Quarter

Change in Value from Prior Quarter

Percent of Portfolio

Percent Shares Owned

Top Buys and Sells

Tenneco Inc.

TEN

Cut

$ 1 million

($24) million

0.03%

0.03%

TRW Automotive Hldgs Corp.

TRW

New

$ 23 million

$23 million

0.91%

0.34%

Baidu Inc.

BIDU

Add

$ 25 million

$22 million

0.98%

0.67%

Northern Oil & Gas Inc.

NOG

Drop

$ 0 million

($22) million

0.00%

0.00%

Brigham Exploration Co.

BEXP

Cut

$ 17 million

($21) million

0.66%

0.38%

Robbins & Myers Inc.

RBN

New

$ 21 million

$21 million

0.82%

0.99%

Check Point Software Tech Ltd.

CHKP

Cut

$ 6 million

($17) million

0.25%

0.06%

Cirrus Logic Inc.

CRUS

New

$ 16 million

$16 million

0.65%

1.15%

Annaly Cap Mgmt Inc.

NLY

New

$ 15 million

$15 million

0.59%

0.11%

Top Holdings

Petroleo Brasileiro Sa Petrobr

PBR

Add

$ 35 million

$13 million

1.38%

0.02%

IPG Photonics Corp.

IPGP

Add

$ 34 million

$3 million

1.35%

1.26%

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are my ‘opinions’ and I may be wrong. I may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to my thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Source: 3 Buys and 1 Sell From Driehaus Capital Management's Richard Driehaus