By Steve Binge
I’ve identified five stocks that hedge fund investor George Soros has held in his portfolio recently. My analysis includes the three telecom companies, a technology company, and an energy company that provide the most yield for the Soros portfolio. In this article I determine if any of these stocks are worth buying right now.
CenturyLink, Inc. (CTL) – The stock price of CenturyLink is down significantly so far this year but with a dividend yield of slightly below 8%, investors haven’t fared too poorly. A good article on the sustainability of its dividend can be found here. Soros reduced his exposure to CenturyLink by roughly 30% in Q3 and now it makes up 0.18% of Soros’ holdings. This is still a fairly large holding for Soros although it may not seem like it because it is a small percentage of his overall holdings. With a market capitalization of only $23 billion, CenturyLink is much smaller than its rivals AT&T, Inc. (T), with a market cap of $171 billion and Verizon Communications, Inc. (VZ), with a market cap of $107 billion, respectively. This means that it is more nimble and has more room to grow. CenturyLink is growing at a much faster clip than its rivals and its year over year quarterly revenue growth is an incredible 162.9%. This growth rate is unlikely to be sustained, but it will still have top line growth much higher than its peers unless it faces some unknown headwind. On the negative side it has a debt to equity ratio of slightly over 100 and this makes it a somewhat higher on the risk scale than we would like as there is little margin for error. CenturyLink has a forward price to earnings ratio of 14 and trades at a price to book ratio of roughly 1 which looks relatively cheap comparatively. If it can manage its debt load it should perform well over the long-term and I would be a buyer of the stock below $32.
Vodaphone Group PLC (VOD) – Vodaphone is an international telecommunications company that represents a fairly significant holding in Soros’ portfolio at 0.14% of his portfolio as of 9/30/11. With a trailing price to earnings ratio of around 12, Vodaphone is more or less in line with the market multiple but much cheaper than its competitor, Deutsche Telekom AG (OTCQX:DTEGY). Deutsche Telekom has a trailing price to earnings ratio of over 28 and lower earnings visibility going forward. Vodaphone pays a nice dividend that is currently yielding 3.6% and has been steadily growing for the past several quarters. Unlike other telecom stocks, Vodaphone has a much stronger balance sheet with a debt to equity ratio of only 42 and $12 billion in cash. Here’s a recent piece that makes a very compelling case for the stock. With the 45% stake in Verizon Wireless and the international exposure it offers, I think Vodaphone should continue growing at a steady clip and the stock will likely perform well over the long-term. I rate the stock as a buy for conservative long-term, income-oriented investors.
Seagate Technology PLC (STX) – Seagate is a tech company with a market cap of around $6.7 billion that Soros has pared to a paltry 0.043% of his overall holdings. It is a fundamentally sound company with a healthy dividend yield of 4.2% that seems fairly secure for the time being. It has a payout ratio of only 33%, which leaves plenty of room for dividend increases in the future. It may seem hard for some to imagine how Seagate will prosper going forward with the advent of tablets and cloud computing, but it is doing well despite operating in what are essentially commoditized markets. The company anticipates revenue of around $3.7 billion for the March 2012 quarter. If earnings come in as projected, Seagate looks very cheap with a forward price to earnings ratio of less than 5. The recent floods in Thailand have given Seagate a temporary advantage over its main rival, Western Digital (WDC), which has suffered greatly from the flood waters. It should allow Seagate to add market share in the near term as discussed here. The main caveat with Seagate is that it has a debt to equity ratio in excess of 143 which doesn’t give it much of a margin for error and I would not recommend buying the stock at current levels but would keep it on my radar screen and wait for a more attractive entry point.
AT&T, Inc. (T) – At 0.185% of George Soros’ portfolio as of the latest quarter, AT&T is one of the larger positions in his broadly diversified portfolio. AT&T currently yields 5.9% and the dividend is expected to grow well into the future. It has a much stronger balance sheet than its rival, the aforementioned CenturyLink, as its debt to equity ratio is much more manageable at 62.5 and it has over $11 billion in cash. AT&T trades at a discount to its main competitor Verizon (VZ), which has a forward price to earnings ratio of almost 15 as compared to less than 12 for AT&T. It also looks cheaper based on its stated book value, Verizon trades at a price to book of 2.7 and AT&T has a price to book of 1.5. However, there are some challenges that face the company going forward as it looks like the deal to buy T-Mobile will likely not happen as discussed in this Bloomberg article. Although there are some issues the company will have to deal with in near term, AT&T would be a good addition to any long-term, income-seeking portfolio. We recommend buying it under $28 per share.
Penn West Petroleum Ltd (PWE) – Penn West is a high yielding stock that George Soros just pared down from his portfolio. It has a dividend yield of 6% but it has negative earnings and probably won’t be able to maintain the dividend at current levels so it’s not too hard to see why Soros sold all of his shares. With a forward price to earnings ratio of over 30, Penn West looks expensive relative to its competitor Encana (ECA), which has a forward price to earnings ratio of roughly 26. However, Penn West has a stronger balance sheet with a debt to equity ratio of around 34 and almost $3 billion sitting in cash. With a negative profit margin and negative returns on equity for the trailing 12 month period, it’s easy to see why Soros gave up on the stock. We would be hesitant to invest in the company until the fundamentals improve significantly.