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In this article, via an analysis (based on the latest available Q3 institutional 13-F filings), we identify the internet content and service companies that are being accumulated and those being distributed by legendary or guru fund managers, such as Warren Buffett, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, based on our extensive database of the buying and selling activities of over 60+ such managers.

We have included in this group ISP and portal companies, as well as those providing specialized content and services-- like for example, for gaming, healthcare, education, advertising, and financial applications, as well those providing a social networking platform. Excluded from the above group are e-commerce companies that are covered separately in another article, and also internet software and infrastructure companies that will be covered later in another article, both of which can be accessed from our author page.

We then crossed that data with the internet content and service companies that are trading at value prices, based on their projected earnings for FY 2012, operating cash flow on a trailing-twelve-month (TTM) basis, and other valuation measures such as price to book (P/B) and price to sales (PSR) ratios, and came up with a list of undervalued companies in the group that are being accumulated by these legendary or guru fund managers, and those being distributed by them. The hedge fund and mutual fund managers included in this select group include only high profile names who, by virtue of their long-term market-beating returns, have earned their standing in the investment community and are worthy of our attention. They include well-known names such as those mentioned above, as well as perhaps relatively lesser-known names that also have a stellar long-term history of beating the markets, such as Seth Klarman, John Griffin, Prem Watsa, Robert Karr and Lee Ainslie.

We determined based on our analysis that guru fund managers are bullish on the internet content and services group, and they are slightly underweight in the group. During the September quarter, these guru fund managers together added a net $1.21 billion to their $6.29 billion prior quarter position in the group, selling $781 million and buying $1.99 billion worth of stocks in the group. Furthermore, overall they are slightly underweight in the group by a factor of 0.9. That is, taken together guru funds have invested 1.7% of their capital in the internet content group compared to the 1.8% weighting of the group in the overall market.

The following are the internet content and services group companies that guru fund managers are bullish about, and that are also trading at a discount to their peers in the group:

Yahoo! Inc. (YHOO): YHOO is a leading global internet search engine, e-commerce and media company. Guru funds added a net $458 million to their $645 million prior quarter position, and taken together guru funds hold 5.5% of the outstanding shares, significantly more than their 2.5% weighting in the group. The top buyer was Third Point LLC ($754 million) that initiated a new position in Q3, and the top guru holders are Third Point and Platinum Investment Management ($180 million).

Overall, 594 institutions hold 73.4% of YHOO shares, with Capital Research Global Investors ($1.30 billion) and Capital World Investors ($999 million) being the largest holders with 6.8% and 5.3% of the outstanding shares respectively. YHOO trades at a discount 18-19 P/E on a trailing-twelve-month basis compared to the 28.2 average for its peers in the internet services group, and it trades at a forward 17-18 P/E compared to 123 average for its peer group, while earnings are projected to rise at a 9.7% compound growth rate from 74c in 2010 to 89c in 2012. Also, it trades at a discount 1.5 P/B and 15.0 P/CF compared to averages of 3.8 and 19.7 respectively for its peers in the internet services group.

Google Inc. (GOOG): GOOG is the Internet’s premier search engine. Guru funds added a net $367 million to their $2.24 billion prior quarter position, and taken together, guru funds hold 1.3% of the outstanding shares-- less than their 2.5% weighting in the group. The top buyers were First Eagle Investment Management ($103 million) and Platinum Investment Management ($100 million), and the top holders are Lone Pine Capital ($546 million), Ruane Cunniff & Goldfarb Inc. ($426 million) and Fisher Asset Management ($410 million).

Overall, 1,416 institutions hold 81.2% of GOOG shares, with Fidelity ($10.22 billion), T Rowe Price ($5.93 billion) and Vanguard Group ($5.84 billion) being the largest holders with 6.8%, 3.9% and 3.9% of the outstanding shares respectively. GOOG trades at a discount 16-17 P/E on a trailing-twelve-month basis compared to the 28.2 average for its peers in the internet services group, and it trades at a forward 13-14 P/E compared to 123 average for its peer group, while earnings are projected to rise at a 21.7% compound growth rate from $29.61 in 2010 to $43.86 in 2012. Also, it trades at a discount 3.5 P/B and 13.3 P/CF, compared to averages of 3.8 and 19.7 respectively, for its peers in the internet services group.

Netease Inc. (NTES): NTES is a Chinese provider of an interactive online gaming community, internet portal and wireless value-added services. Guru funds added a net $76 million to their $224 million prior quarter position, and taken together guru funds hold 4.8% of the outstanding shares, less than their 2.5% weighting in the group. The top buyers were Lone Pine Capital ($63 million) and Columbia Wagner Asset Management ($25 million), and the top guru holder is Lone Pine Capital ($273 million).

Overall, 185 institutions hold 51.1% of NTES shares, with Orbis Holdings ($706 million), Capital Research Global Investors ($456 million) and Lone Pine being the largest holders with 12.5%, 8.1% and 4.9% of the outstanding shares respectively. NTES trades at a discount 10 forward P/E compared to the 26.1 average for its peers in the internet content group, while it is projected to rise at a 29.7% compound growth rate from $2.55 in 2010 to $4.29 in 2012. Also, it trades at a discount 2.0 P/B and 9.6 P/CF compared to averages of 3.3 and 15.5 respectively for its peers in the internet content group.

Besides the undervalued positions listed above, guru funds are also bullish on the following (see Table):

Sina Corp. (SINA): SINA is a Chinese internet portal offering media content and services for China and global Chinese communities. Guru funds added a net $187 million to their $103 million prior quarter position, and taken together guru funds hold 5.5% of the outstanding shares, significantly greater than their 2.5% weighting in the group. SINA trades at a premium 42 forward P/E compared to the 26.1 average for its peers in the internet content group.

Webmd Health Corp. (WBMD): WBMD provides healthcare related content to consumers and healthcare professionals via webmd.com and medscape.com. Guru funds added a net $66 million to their $5 million prior quarter position, and taken together, guru funds hold 4.3% of the outstanding shares, significantly greater than their 2.5% weighting in the group. WBMD trades at a premium 39 forward P/E compared to the 26.1 average for its peers in the internet content group.

Renren Inc. (RENN): RENN, often called the Facebook of China, is a Chinese operator of a social networking platform that enables users to communicate and share information via Renren.com. Guru funds added a net $3 million to their $14 million prior quarter position, and taken together guru funds hold 1.2% of the outstanding shares, significantly less than their 2.5% weighting in the group. RENN currently generates losses, and it trades at 1.2 P/B compared to 2.0 average for its peers in the internet services delivery group.

Furthermore, select stocks that guru funds as a group are bearish on (see Table) include:

LinkedIn Corp. (LNKD): LNKD operates an online professional network via its proprietary social networking platform that enables members to create, manage and share their professional identities online, build and engage with their professional network, access shared knowledge and insights, and find business opportunities. Guru funds cut a net $1 million from their $18 million prior quarter position, and taken together, guru funds hold 0.3% of the outstanding shares, significantly less than their 2.5% weighting in the group. LNKD trades at a premium of over 300 forward P/E compared to the 28.2 average for its peers in the internet services group.

Yandex NV (YNDX): YNDX is a Russian provider of internet search and web content, including news, mail and maps. Guru funds cut a net $100 million from their $1.34 billion prior quarter position, and taken together, guru funds hold 35.2% of the outstanding shares, significantly greater than their 2.5% weighting in the group. YNDX trades at a 26 forward P/E compared to the 26.1 average for its peers in the internet content group.

Table

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General Methodology and Background Information: The latest available institutional 13-F filings of over 60+ legendary or guru hedge fund and mutual fund managers were analyzed to determine their capital allocation from among 50+ different industry groupings, and to determine their favorite picks and pans in each group. Each guru has been carefully selected based on their long-term performance and standing in the investment community. Furthermore, the credentials of most of the 60-odd guru funds that justify their inclusion in this elite group were detailed in our previous articles, many of which can be accessed by clicking on the hyperlinks referencing them in the above Table and in the article.

These legendary or guru fund managers number less than one percent of all funds, and yet, they control almost ten percent of the U.S. equity discretionary fund assets. The argument is that institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When high alpha generating or guru Institutional Investors by virtue of their fund performance, low volatility and elite reputation in the investment community, invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence, or even go as far as constructing a model diversified portfolio based on the guru funds best picks.

This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.

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 our ‘opinions’ and we may be wrong. We 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 our 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: Internet Group: Q3 Undervalued Picks By Legendary Money Managers