Chuck Akre has been in the investment business since 1968. While sometimes viewed as a small cap growth manager, Akre follows a value strategy that focuses on returns on equity, management quality and cash flow-oriented valuation analysis.
The following are Akre's Top 10 investment ideas, based on our proprietary MOI Signal Rank methodology. MOI Signal Rank answers the question, “What are this investor’s top ten ideas right now?” Rather than simply presenting each investor’s largest holdings as of the recently filed quarter end, the MOI’s proprietary methodology ranks the companies in each investor’s portfolio based on the investor’s current level of conviction in each holding, as judged by the MOI. Our proprietary methodology takes into account a number of variables, including the size of a position in an investor’s portfolio, the size of a position relative to the market value of the corresponding company, the most recent quarterly change in the number of shares owned, and the change in the stock price of a position since the most recent quarterly filing date.
MOI Signal RankTM - Top Idea of Akre Capital
Aeropostale (ARO) ($17 per share; MV $1.4 billion; EV $1.3 billion), based in New York, NY, is a mall-based specialty apparel retailer targeting 14 to 17 year-olds through Aeropostale stores and 7 to 12 year-olds through P.S. stores. The number of stores increased 6% from 952 at the end of the fiscal year ended January 30, 2010 to 1,012 at yearend FY11. Analysts expect Aeropostale to earn $1.60 per share in FY12 (11x P/E), followed by $1.93 (9x) and $2.33 (7x) in subsequent years. Aeropostale has a high-return business, with a seven-year average return on equity of 46%.
Aeropostale suspended full-year guidance when it reported Q1 results in May, guiding for Q2 EPS of $0.11-0.16 per share. According to CEO Tom Johnson:
Our outlook for the second quarter reflects our plans to aggressively clear through spring inventories to position ourselves appropriately for the important back to school selling season. While we are disappointed with our current performance, we are confident that our entire organization is focused on the right initiatives to regain market share.
The company's latest investor presentation provides more color on Aeropostale's current challenges.
American Tower (AMT) ($50 per share; MV $20 billion; EV $25 billion) leases antenna space on multi-tenant communications sites to wireless service providers and radio and TV broadcasters. The company's portfolio consists of towers it owns and towers it operates on long-term leases, including roughly 21,000 towers in the U.S. and 14,000 towers internationally. Operating income rose 17% from $672 million in 2009 to $784 million in 2010, while revenue rose 15% during the same period.
Analysts expect American Tower to earn $0.96 per share in 2011 (52x P/E), followed by $1.34 (37x) and $1.76 (29x) in subsequent years. For the full year 2011, management is guiding for rental and management revenue of $2.30-2.34 billion, adjusted EBITDA of $1.53-1.57 billion, and income from continuing ops of $330-370 million. The recent investor presentation contains additional guidance items.
Annaly Capital (NLY) ($18 per share; MV $15 billion; EV $96 billion) is a REIT that owns a portfolio of mortgage pass-through certificates, collateralized mortgage obligations, Agency callable debentures, and other securities backed by mortgage loans. Total assets rose 20% from $69 billion at the end of 2009 to $83 billion at yearend 2010. Analysts expect Annaly to earn $2.53 per share in 2011 (7x P/E), followed by $2.38 (8x) and $1.68 (11x) in subsequent years. The company trades at 1.2x tangible book value of $13 billion. The dividend of $2.48 per share, a decrease of 6% from a year ago, implies a yield of 13%.
Dollar Tree (DLTR) ($63 per share; MV $7.7 billion; EV $7.4 billion), based in Chesapeake, VA, operates roughly 4,100 discount variety stores (optimal size of 8,000-10,000 square feet) selling merchandise for $1. The stores are branded Dollar Tree, Deal$, Dollar Tree Deal$, Dollar Giant or Dollar Bills. The number of stores increased 8% from 3,806 at the end of the fiscal year ended January 30, 2010 to 4,101 at yearend FY11. Analysts expect Dollar Tree to earn $3.86 per share in FY12 (16x P/E), with $4.40 (14x) and $4.91 (13x) in subsequent years.
Lamar Advertising (LAMR) ($27 per share; MV $2.5 billion; EV $4.8 billion), based in Baton Rouge, LA, has operated since 1902 and is one of the largest outdoor advertising companies in the U.S. The company sells ads on billboards, buses, shelters, benches and logo plates. It owns 146K billboards in the U.S. and Canada, 108K logo ad displays, and 30K transit ad displays. Operating income rose 43% from $97.6 million in 2009 to $140 million in 2010, while revenue increased 3% during the same period. Analysts expect Lamar to earn $0.03 per share in 2011, followed by $0.28 (97x) and $0.64 (42x) in each of the next two years, respectively.
LPL Investment (LPLA) ($34 per share; MV $3.7 billion; EV $4.4 billion), based in Boston, MA, provides a platform of technology, brokerage and investment advisory services to 12,000+ financial advisors across the U.S. The company also serves 4,000 advisors with clearing, advisory platforms and tech solutions, spanning front, middle and back-office support. The number of advisors increased 4% from 12K at the end of 2009 to 12K at yearend 2010. Wall Street expects LPL Investment to earn $1.98 per share in 2011 (17x P/E), with $2.39 (14x) and $3.04 (11x) in each of the next two years, respectively.
MasterCard (MA) ($266 per share; MV $32 billion; EV $28 billion) is a leading global card payments company that supports the credit, debit and prepaid payment programs of 22,000 financial institutions and other entities. Transactions processed on a global scale increased 3% from 22 billion in 2009 to 23 billion in 2010, while revenue increased 9% during the period. Analysts expect MasterCard to earn $17.02 per share in 2011 (16x P/E), with $19.98 (13x) and $23.22 (11x) in the following years. MasterCard has a high-return business, with an average return on equity of 26% over the past seven years.
O'Reilly Automotive (ORLY) ($62 per share; MV $8.6 billion; EV $8.8 billion), based in Springfield, MO, is one of the largest specialty retailers of auto parts in the U.S. The number of stores increased 4% from 3,421 at the end of 2009 to 3,570 at yearend 2010. The Street expects O'Reilly to earn $3.57 per share in 2011 (17x P/E), followed by $4.00 (16x) and $4.53 (14x) in subsequent years.
In January, O'Reilly approved a $500 million share repurchase. In Q1, the company repurchased 2.6 million shares at $55 per share, while subsequent to the end of Q1, the company repurchased an additional 1.0 million shares at $56 per share. Management is guiding for comparable sales store growth of 3-6% in 2011.
optionsXpress (OXPS) ($16 per share; MV $930 million; EV $940 million), based in Chicago, IL, operates in two segments: Brokerage Services provides Internet-based options, stock, bond, mutual fund and futures brokerage to retail customers primarily in the U.S. Education Services focuses on financial topics such as stocks, market analysis, options, foreign exchange and financial planning. The number of customer accounts increased 8% from 351K at the end of 2009 to 379K at yearend 2010.
Wall Street expects optionsXpress to earn $0.95 per share in 2011 (17x P/E), with $1.13 (14x) and $1.42 (11x) in each of the next two years, respectively. optionsXpress has raised the dividend four times in seven years. The company has a high-return business, with an average return on equity of 48% over the past seven years.
Ross Stores (ROST) ($75 per share; MV $8.8 billion; EV $8.3 billion), based in Pleasanton, CA, operates two brands of off-price apparel and home accessories stores, comprised of nearly 1,000 were Ross Dress for Less locations and nearly 70 dd’s DISCOUNTS stores. Both brands target value-conscious middle-income customers between the ages of 18 and 54, although the dd’s DISCOUNTS stores also reach into the lower-income segment. The number of stores increased 5% from 1,005 at the end of the fiscal year ended January 30, 2010 to 1,055 at yearend FY11.
The Street expects Ross to earn $5.35 per share in FY12 (14x P/E), with $5.96 (13x) and $6.61 (11x) in each of the next two years, respectively. Ross has boosted the dividend six times in seven years, delivering an annualized growth rate of 27% during the period. The company operates a high-return business, with an average return on equity of 31% over the past seven years.
CEO Mike Balmuth commented on Q1 results:
Operating margin for the quarter grew about 160 basis points to a record 13.7%. The largest driver of this increase was a 130 basis point improvement in gross margin, which benefited mainly from higher merchandise gross margin and lower occupancy and distribution expenses as a percent of sales. Selling, general and administrative costs as a percent of sales declined by about 30 basis points, primarily due to decreases in store operating costs and general and administrative expenses as a percent of sales.
Meanwhile, management has provided the following guidance:
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
For the second quarter ending July 30, 2011, we are currently forecasting same store sales to increase 2% to 3% and earnings per share of $1.15 to $1.20, up from last year's $1.07. This represents 7% to 12% projected growth on top of 30% and 52% increases for the second quarters of 2010 and 2009, respectively. In addition, we are raising our earnings per share guidance for the 2011 fiscal year ending January 28, 2012 to $5.16 to $5.31, above our initial guidance of $4.90 to $5.10. This updated range represents projected growth of 11% to 15% over earnings per share of $4.63 in fiscal 2010.