3 Buys and 2 Sells From Hedge Fund Egerton Capital

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 |  Includes: AAPL, APD, AXP, CHKP, DIS, ITUB, NDAQ, NICE, NWSA, ORCL, UNP, WFC
by: GuruFundPicks

Summary: London-based hedge fund Egerton Capital Ltd. headed by John Armitage concentrates on the Europe equity markets in making its long/short investments. However, more than a third of its portfolio is in U.S. traded equity assets. Three attractive buys from the Egerton portfolio include Israeli company Nice Systems Ltd. (NASDAQ:NICE), database developer Oracle Corp. (NASDAQ:ORCL) and Walt Disney Co. (NYSE:DIS). Furthermore, two conviction sells include rail transportation company Union Pacific Corp. (NYSE:UNP) and specialty gas and chemicals company Air Products & Chemicals (NYSE:APD).

London-based hedge fund Egerton Capital was founded in 1994 by John Armitage and Tiger Cub William Bollinger. The firm manages $4.5 billion in assets and uses long/short equity strategy in making its investments. The fund concentrates on investing in under-valued stocks of Europe based companies. However, $1.6 billion of its investments are in U.S. traded equities. The fund has returned over 15% compound return since inception.

The fund holds a concentrated portfolio of 18 positions in its U.S. equity portfolio, with more than 95% in large-cap equities. Its portfolio turnover is around 80% implying an average holding period of fourteen months. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that the portfolio is overweight technology (35%), service (26%) and transportation (10%) sectors, and it has no holdings in the energy, basic materials, utility, healthcare and industrial sectors.

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 Nice Systems ADR and Buy Oracle Corp. Egerton added $136 million to its $406 million position in the technology sector, including adding $55 million to its prior quarter $44 million position in Check Point Software Technology (NASDAQ:CHKP), an Israeli provider of internet security software, hardware and services. The CHKP position was opened in the low-$40s at the end of 2010, so the fund adding more in the $50s last quarter is high conviction buying. However, 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. Tfund also opened a new $39 million position in Nice Systems Ltd., an Israeli developer of voice communications, video and instant messaging monitoring and recording platforms. NICE currently trades at a forward P/E of 15 which is near the low end of its historic P/E range, analyst targets are in the mid-$40s, and the stock is an attractive buy at these levels. The fund also added $61 million to its large $168 million position in database developer Oracle Corp. The position in ORCL was bought in the mid-$20s in the summer of 2010, so its buying more in the low-$30s last quarter is a huge conviction buy. ORCL trades at forward P/E of 14 which is in the mid-range based on its historic P/E range, analyst targets are in the $40s and the stock has recently pulled back more than 15%. The stock would be an attractive buy in the high-$20s. Apple Inc. (NASDAQ:AAPL) at $210 million is one of its largest high conviction positions, and Egerton has been taking some off the table as the stock continues its uptrend.
  • Service sector: Buy Walt Disney Co. Egerton added $106 million to its prior quarter $300 million position in the service sector, adding a new $119 million position in Walt Disney Company that operates theme parks and resorts, produces filmed entertainment, and licenses, publishes and sells toys, and books. DIS stock is trading at a forward 15 P/E, near the low-end of its historic P/E range, and it has pulled back recently more than 15% and analyst targets continue to be in the $50s. It is an attractive buy at these levels as earnings are projected to continue growing at a 15%-20% annual clip in the short-term. Furthermore, Egerton also has its largest position at $238 million in News Corp. (NASDAQ:NWSA), an international holding company engaged in newspaper, magazine, book publishing, TV, broadcasting and films. The NWSA position was just opened in the December 2010 quarter in the mid-teens.
  • Finance sector: Egerton added $77 million to its prior quarter $226 million position, adding a new $98 million position in diversified financial services company Wells Fargo & Co. (NYSE:WFC), adding $45 million to its $44 million position in charge and credit card payment products company American Express Co. (NYSE:AXP), and selling out of its $49 million position in Nasdaq OMX Group Inc. (NASDAQ:NDAQ). The position in AXP was opened in the mid-$40s in the December 2010 quarter, so the doubling of that position is a conviction buy. The position in NDAQ was opened in the low-$20s in the December 2010 quarter, so the selling out in the high-$20s in three months was probably profit-taking.
  • Transportation sector: Sell Union Pacific Corp. Egerton sold out of its only position in the sector, selling its $104 million position in Union Pacific Corp., a provider of rail transportation with 31,953 miles of main and branch line track across 23 states in the western U.S. The position in UNP was opened in the $60s at the beginning of 2008; it dropped since to $30s in the 2008/09 crisis, and has since risen to above $100, so the selling out of this position is probably profit-taking. The stock is trading at a forward P/E of 15, at the top of its historic P/E range and has gone up three-fold in the last two years, and is a conviction sell at these price levels.
  • Basic materials sector: Sell Air Products & Chemicals. Egerton sold out of its only position in the sector, selling its $110 million position in Air Products & Chemicals (APD), a provider of industrial and specialty gases, chemicals and equipment to the metals, chemical, food, steel and other markets. The APD position was opened in the mid-$70s in the summer of 2010, and the stock currently sells at a forward P/E of 16, near the top of its historic P/E range and appears fully priced.

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

Disney Walt Co.

DIS

New

$ 119 million

$119 million

7.30%

0.15%

Air Prods & Chemicals Inc.

APD

Drop

$ 0 million

($110) million

0.00%

0.00%

Union Pacific Corp.

UNP

Drop

$ 0 million

($104) million

0.00%

0.00%

Wells Fargo & Co.

WFC

New

$ 98 million

$98 million

6.00%

0.06%

Oracle Corp.

ORCL

Add

$ 230 million

$61 million

14.03%

0.14%

Check Point Software

CHKP

Add

$ 99 million

$55 million

6.02%

0.93%

Nasdaq OMX Group Inc.

NDAQ

Drop

$ 0 million

($49) million

0.00%

0.00%

American Express Co.

AXP

Add

$ 98 million

$45 million

6.02%

0.18%

Itau Unibanco Hldg SA

ITUB

Drop

$ 0 million

($41) million

0.00%

0.00%

Nice Sys Ltd.

NICE

New

$ 39 million

$39 million

2.39%

1.66%

Top Holdings

News Corp

NWSA

Cut

$ 238 million

($1) million

14.55%

0.74%

Apple Inc

AAPL

Cut

$ 210 million

($13) million

12.83%

0.07%

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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.

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