5 New Big Buys From Super Investor Paul Tudor Jones

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Includes: BAX, CFN, HME, PFE, SBUX
by: Stock Croc

Paul Tudor Jones founded the hedge fund Tudor Investment Corporation in 1980, which now has approximately $11 billion of funds under management. He is well known for having tripled his capital by anticipating the 1987 market crash.

Jones is a contrarian investor who attempts to buy and sell on price turning points, and considers himself a market opportunist, with a focus on swing trading and market timing. He believes prices move first and fundamentals come second. He is known to be bullish on Asian currencies, as he believes they are trading at a discount to the US dollar. Jones is bullish on gold and has shown some bullishness toward Chinese stocks. In this article I will analyze five recent stock investments made by Jones to determine whether they represent solid investments in stocks that will continue to grow in value.

Starbucks Corporation (NASDAQ:SBUX)

Starbucks has a market cap of $30.94 billion and is trading at around $41.50, with a price-to-earnings ratio of 25.64. Its 52-week trading range is $30.14 to $44.70. It reported third-quarter 2011 earnings of $2.93 billion, an increase from second-quarter earnings of $2.79 billion and the third-quarter net income was $279.30 million, an increase from second-quarter net income of $261.50 billion. It has quarterly revenue growth of 6.8%, a return on equity of 30.93% and pays a dividend with a yield of 1.6%

One of Starbuck’s competitors is Dunkin’ Brands Group Inc (NASDAQ:DNKN), which has a market cap of $2.97 billion and is trading around $25, with a price-to-earnings ratio of 45.86. It has quarterly revenue growth of 9.3%. This data indicates that it is being outperformed by Starbucks.

Jones now holds 300,400 shares of Starbucks, buying the entire holding in the third quarter 2011, at an average price per share of $38.76. Based upon the last trading price of $41.25, he has made a return of 6.42%.

Starbuck’s cash position has improved in the last quarter. Its balance sheet showed $1.72 billion in cash for the third quarter, an increase from $1.65 billion cash in the second quarter. Starbuck’s quarterly revenue growth of 6.8%, versus an industry average of 20.9%, and a return on equity of 30.93%, versus an industry average of 23.9%, indicates that it is underperforming many of its competitors.

The outlook for the specialty eateries industry is cautiously optimistic, despite weaker consumer spending trends triggered by high unemployment and ongoing economic uncertainty. The outlook is cautiously optimistic as the majority of industry participants are working to grow market share by targeting emerging markets such as China and Latin America. So far this strategy has been successful and allowed them to maintain some earnings growth.

Starbucks presents as an attractive investment opportunity, because it has reported an increase in net income in a difficult operating environment and increased its balance sheet cash. The company also has strong performance indicators. This means it is well positioned for increased earnings growth when there is an uplift in the economy. On this basis it is easy to see the rationale for Jones’ decision to invest in the company. I rate Starbucks a buy.

Baxter International Inc (NYSE:BAX)

Baxter has a market cap of $26.98 billion and is trading at around $48. Its 52-week trading range is $47.84 to $62.50. It reported third-quarter 2011 earnings of $3.48 billion, a decrease from second-quarter earnings of $3.54 billion and third-quarter net income was $576 million, a decrease from second-quarter net income of $615 million. It has quarterly revenue growth of 7.9% and a return on equity of 31.68% and pays a dividend with a yield of 2.7%.

One of Baxter’s competitors is Grifols SA (NASDAQ:GRFS), which has a market cap of $3.01 billion and trades at around $5, with a price-to-earnings ratio of 28.86. It has quarterly revenue growth of 127.2% and a return on equity of 5.56%. This data indicates that it has greater earnings growth than Baxter, but is not generating the same return on shareholders’ equity.

Jones holds 329,200 shares of Baxter, buying the entire holding in the third quarter 2011, at an average price per share of $56.44. Based upon the last trading price of $47.83, he has made a return of -15.26%.

Baxter’s cash position has improved in the last quarter. Its balance sheet showed $2.34 billion in cash for the third quarter, an increase from $2.02 billion cash in the second quarter. Baxter’s quarterly revenue growth of 7.9%, versus an industry average of 14%, and a return on equity of 31.68%, versus an industry average of 13.5%, indicates that it isn’t generating the same level of revenue growth as its competitors but is generating a superior return on shareholder equity.

The earnings outlook for the medical supplies and instruments industry is currently subdued, primarily due to the poor economy and the impact of the significant health reforms that were enacted in 2010. This has increased pressure on providers to reduce costs and improve quality of care, both of which have a direct impact on demand for medical supplies. In addition, the industry is highly competitive and this is seeing a lot of pressure being applied to margins.

Despite Baxter’s decrease in third-quarter net income and the negative industry outlook, I agree with Jones’ investment decision as the company has increased its balance sheet cash and has a solid return on equity. On this basis I rate Baxter a buy.

Pfizer Inc (NYSE:PFE)

Pfizer has a market cap of $142.98 billion and is currently trading at around $18.50, with a price-to-earnings ratio of 12.92. Its 52-week trading range is $16.25 to $21.45. It reported third-quarter 2011 earnings of $17.19 billion, an increase from second-quarter earnings of $16.98 billion. Third-quarter net income was reported at $3.74 billion, an increase from second-quarter net income of $2.61 billion. It has quarterly revenue growth of 7.5% and a return on equity of 11.45% and pays a dividend with a yield of 4.2%.

One of Pfizer’s competitors is Novartis AG (NYSE:NVS), which has a market cap of $127.63 billion and is trading at around $53, with a price-to-earnings ratio of 12.43. It has quarterly revenue growth of 17.3%, a return on equity of 15.56% and a pays a dividend with a yield of 3.7%. Based on these indicators it is outperforming Pfizer.

Jones holds 1,134,500 shares in Pfizer, with the entire holding bought in third quarter 2011 at an average price per share of $18.75. Based on the last trading price of $18.45 he has made a return of -1.63%.

Pfizer’s cash position has significantly improved in the last quarter. The balance sheet showed $3.71 billion in cash for the third quarter, an increase from $3.10 billion in the second quarter. Pfizer’s quarterly revenue growth of 7.5%, versus an industry average of 10.5%, and a return on equity of 11.45%, versus an industry average of 15.8%, indicates that it is underperforming many of its competitors.

The earnings outlook for companies in the drug manufacturing industry is currently subdued, due to the poor economy and high unemployment. Many drug manufacturers found 2011 to be a challenging year, although they have been able to offset declining revenue growth with price increases in the US and growing revenue from emerging markets. It is believed that is will continue into 2012 with Moody’s recently stating that 2012 will be an even more challenging year for participants in this industry.

Despite the negative industry outlook I believe that Pfizer represents a solid investment opportunity and agree with Jones’ investment decision. This is due to Pfizer reporting an increase in net income and balance sheet cash as well as having strong performance indicators and paying a dividend with an attractive yield. Accordingly, I rate the company a buy.

Home Properties Inc (NYSE:HME)

Home Properties has a market cap of $2.54 billion and currently trades at around $52.50, with a price-to-earnings ratio of 68.54. Its 52-week trading range is $52.53 to $67.27. Third-quarter 2011 earnings of $144.62 million was reported, an increase from second-quarter earnings of $140.69 million. Third-quarter net income was $8.51 million, an increase from second-quarter net income of $8.20 million. It has quarterly revenue growth of 12.4%, and a return on equity of 3.27% and pays a dividend with a yield of 4.5%.

One of Home Properties’ competitors is Apartment Investment and Management Co (NYSE:AIV), which has a market cap of $2.48 billion and is trading at around $20.50. It has quarterly revenue growth of 7.6% and a return on equity of -10.61% and pays a dividend with a yield of 2.3%. Based on this it is being outperformed by Home Properties.

Jones holds 200,000 shares in Home Properties, with the entire holding purchased in the third quarter 2011 at an average price per share of $62.82. Based on the last trading price of $52.71 he has made a return of -16.10%.

Home Properties' cash position has improved, with the third-quarter balance sheet showing $204.08 million in cash, an increase from $32.46 million in the second quarter. Home Properties' quarterly revenue growth of 12.4%, versus an industry average of 4%, and a return on equity of 3.27%, versus an industry average of 6.6%, indicates that it is generating greater revenue growth than its competitors but not the same return on equity.

The outlook for the REIT residential industry is positive despite the challenging economic conditions and market uncertainty. Overall the industry is seen as an attractive investment because REITs generate income, an attractive dividend yield as well as the fact that they own hard assets.

Home Properties is an attractive investment opportunity as it has increased its net income and cash holdings in a difficult operating environment. It also has solid performance indicators and pays a dividend with an attractive yield, which indicates that it is well positioned for growth. Accordingly I rate Home Properties a buy.

CareFusion Corporation (NYSE:CFN)

CareFusion has a market cap of $5.19 billion, and is currently trading at around $23, with a price-to-earnings ratio of 19.26. Its 52-week trading range is $22.01 to $29.97. It reported third-quarter 2011 earnings of $844 million, a substantial decrease from second-quarter earnings of $964 million. Third-quarter net income was $67 million, a substantial decrease from second-quarter net income of $85 million. It has quarterly revenue growth of 4.1% and a return on equity of 6.49%.

One of CareFusion’s competitors is Becton, Dickinson and Company (NYSE:BDX), which has a market cap of $15.39 billion, a price-to-earnings ratio of 12.60 and is trading at around $71. It has quarterly revenue growth of 18.4%, a return on equity of 23.57% and pays a dividend with a yield of 2.3%. Based on these performance indicators, it is outperforming CareFusion.

Jones holds 466,400 shares in CareFusion, purchasing the entire holding in the third quarter 2011 at an average purchase price per share of $25.45. Based on the last trading price of $23.11, he has made a return of -9.19%.

CareFusion’s cash position declined in the last quarter. The balance sheet showed $1.19 billion in cash for the third quarter 2011 a decrease from $1.37 billion in the second quarter. CareFusion’s quarterly revenue growth of %, versus an industry average of 14%, and a return on equity of %, versus an industry average of 13.5%, indicates that it is underperforming many of its peers.

The earnings outlook for the medical supplies and instruments industry as stated earlier is subdued, primarily due to the poor economy and the impact of the significant health reforms that were enacted in 2010.

When the negative industry outlook is considered in conjunction with CareFusion’s decreased earnings, net income and cash holdings it is difficult to see the company being able to take advantage of any growth opportunities or uplift in the economy. Therefore, I do not believe that the company’s stock price will increase over the short to medium term. Accordingly, I do not agree with Jones’ investment in the company and I rate CareFusion a sell.

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