One of the myriad of strategies or tools used by investors is to monitor the trading decisions of some of the world’s largest and most accomplished asset managers. George Soros is one of these managers that commands great attention, given his role in the investment community. Mr. Soros was one of the true pioneers of the hedge fund industry, and his Quantum Fund is arguably the best returning fund of all time.
As such, the trading decisions and portfolio calls that he makes can move markets. Paying attention to his choices can not only guide one to stocks that should be bought or sold, but can give one insight into the trends that are not always apparent in the market. What follows are some of Mr. Soros’s decisions and some analysis of what they mean, how the information may be useful, and alternative to be considered.
Nike, Inc. (NKE) – As of the end of the first quarter of 2011, Mr. Soros flattened his position in NKE, bringing his holdings in the stock down to zero. Over the past several years, this stock has languished a bit during some months and roars back going into the back-to-school period, making Mr. Soros’s timing reasonable and understandable. The fact that he has not re-established a position that has been disclosed suggests that the Japanese slowdown may have been of increased concern, or other global factors may have contributed, like rising input cost as well as elevated shipping costs.
While many competitors have fallen by the wayside – particularly in terms of athletic shoes, Under Armour Inc. (UA) has been a strong player in the athletic wear segment. Despite the strength of UA, NKE looks better at current financial metric levels, trading at a trailing price-to-earnings ratio of 19.9 relative to 49 for UA. NKE also operates more efficiently, with an operating margin of 13.5% versus 10% for UA.
Some of these differences may be attributable to differences in each company’s business line, unless the global trend towards exercise reverse, both are worth further consideration.
Incyte Corp. (INCY) – By the end of 2010, Mr. Soros flattened his position in INCY, bringing his holdings in the stock down to zero, after having established his position within the previous quarter. Opining on a biotechnology company can be tricky, but trying to place the trade of an asset manager in this space is even more challenging.
What can be gleaned from the move is that Mr. Soros discovered something about the company that prompted the sale. In terms of comparable companies, the nature of biotech is highly idiosyncratic. Rather, for those who are looking for exposure in biotech without needing the same level of company specific risk, a company like Amgen Inc. (AMGN) is more appropriate. With a market capitalization of $50 billion, the company is a full 25 times larger than INCY. The company trades at a reasonable trailing price-to-earnings ratio of 11.4 and has an operating margin of 34.9%.
Unless one has the capital to invest across a spectrum of smaller companies in the hope that the success of a few will offset the failures of the rest, selecting a large and diversified option is often more prudent.
The Interpublic Group of Companies, Inc. (IPG) – As of the end of the first quarter of 2011, Mr. Soros flattened his position in IPG, bringing his holdings in the stock down to zero. In late July, the price of IPG fell from above $12 per share to below $8 per share; another shining example of Mr. Soros’s ability to not only pick quality companies, but exercise fortuitous market timing.
This selloff has changed the fundamental picture for IPG with respect to financial metrics, particularly when compared to Omnicom Group, Inc. (OMC), a close competitor. While OMC still looks cheaper on a trailing price-to-earnings basis, with a reading of 13.2 versus 15.6 for IPG, when the growth element is introduced to calculate the price-to-earnings over growth (PEG), IPG looks more interesting at 0.75 relative to 1.1. This last metric is arguably more apt because it is forward looking, incorporating expected growth, but both companies are competitive.
Ultimately, however, with an operating margin of 12.9% for OMC and 8.3% for IPG, the former edges IPG out by a thin margin.
FLIR Systems Inc. (FLIR) – As of the end of the first quarter of 2011, Mr. Soros flattened his position in FLIR, bringing his holdings in the stock down to zero. When compared to competitors, specifically L-3 Communications Holdings (LLL), across most major financial metrics the company is not the strongest choice.
On a trailing price-to-earnings basis, FLIR is trading at 19.3 relative to 7.9 for LLL. This suggests that the company is significantly overvalued on a relative basis. Even when growth is introduced, the companies are even in terms of price-to-earnings over growth (PEG), suggesting that the relative attractiveness of LLL is legitimate.
With an operating margin about 20%, one could argue that FLIR makes a nice growth play, but the valuation is not justified at current levels.
CenterPoint Energy, Inc. (CNP) – As of the end of the first quarter of 2011, Mr. Soros flattened his position in CNP, bringing his holdings in the stock down to zero. CNP, like most energy companies has fared well over the past several months.
The company seems to be in line with its major competitors, American Electric Power (AEP) and Xcel Energy (XEL). On a technical basis, the stock is approaching a major resistance level just about $20 per share.
If it is able to push through this level, there may be significant upside remaining in the stock. If not, other options may be more attractive.
Transocean Ltd. (RIG) – As of the end of the first quarter of 2011, Mr. Soros flattened his position in RIG, bringing his holdings in the stock down to zero. While RIG recovered to some extent after the hit it took for its role in the British Petrol (BP) spill, since the end of the first quarter the stock has performed poorly, falling from over $75 per share to as low as $50.
Despite this pressure, the company is well run, and this selloff may represent a solid entry point into a good company. In the alternative, Noble Corp. (NE) is well positioned within the industry and may be poised to benefit from the weakness in RIG.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.