New York-based Hedge Fund Blue Ridge Capital Holdings LLC, headed by Guru, Tiger Cub and Star Manager John Griffin, manages $5.1 billion in U.S. equity assets, per its most recent SEC 13-F filing for the September 2011 quarter (for a detailed profile of the fund and Mr. Griffin, look at the end of the article). The fund is targets absolute returns by going long/short equity with a long bias, it employs fundamental analysis and seeks to invest in companies that dominate their industries and short the companies that have fundamental problems.
The following are high growth companies that dominate their industries that Blue Ridge Capital is bullish on based on its Q3 filing. Of these, AAPL is undervalued based on a comparison of its valuation and growth to peers in their group, and RRC, AMZN and NFLX trade at a more premium valuation compared to their industry peers (see Table):
Apple Inc. (AAPL): Probably among the most innovative companies the world has ever known, this maker of the iPhone, iPod, and iPad, founded by the late Steve Jobs, is one of the world's largest manufacturers of personal computers, mobile communication devices, and portable digital music players. At $504 million and unchanged in Q3, this is the largest position in Blue Ridge's portfolio.
This gem of a company can be bought for 10-11 P/E compared to 9.2 average for its peers in the micro-computer group, but adjusted for growth the company trades at a discount; earnings at AAPL are projected to increase at a compound 19.0% annualized rate from $27.68 in 2011 to $39.19 in 2013, compared to the average 5%-10% growth rates for many of its peers in the group. AAPL shares have fared remarkably well since the sad and early demise of Mr. Jobs; however, the over-riding question for AAPL investors is how AAPL will do in terms of innovation long-term without Mr. Jobs at the helm. We believe it is too early to decipher that, and the risk is probably to the downside in the interim as even a slight error in execution is likely to get severely punished.
Range Resources Corp. (RRC): RRC is engaged in the exploration and production of oil and natural gas in the south-western and Appalachian regions of the U.S. At $256 million and unchanged in Q3, this is the fifth largest position in Blue Ridge's portfolio. RRC revenue and earnings are projected to increase from $911 million and 69c in 2010 to $1.40 billion and $1.31 in 2012. The stock trades at a premium 41 forward P/E, and at 3.7 P/B, compared to averages of 19.3 and 5.2 for its peers in the US oil and gas exploration and production group. Besides Blue Ridge, other major funds that accumulated RRC shares in Q3 include Goldman Sachs adding 3.7 million shares to its 0.3 million share prior quarter position and Blackrock Advisors adding 2.5 million shares to its 2.0 million share prior quarter position.
Amazon.com Inc. (AMZN): AMZN is a leading online retailer in North America and internationally. At $346 million and unchanged in Q3, this is the second largest position in Blue Ridge's portfolio. While earnings are projected to fall this year to $1.19 from $2.53 in 2010, and they are projected to rise to $1.93 in 2012, revenues growth is expected to continue undisturbed from $34.2 billion in 2010 to $48.8 billion in 2011 and $65.4 billion in 2012.
The stock trades at a premium 92 forward P/E compared to the average 70.5 P/E for its peers in the Internet Commerce group, and it trades at a discount 1.8 PSR (price-to-sales ratio) compared to the 3.1 average for its peers. Besides Blue Ridge, other major funds that accumulated AMZN shares in Q3 include Goldman Sachs adding 1.9 million shares to its 0.1 million share prior quarter position, and Fidelity Investments adding 3.6 million shares to its 17.3 million share prior quarter position.
Netflix Inc. (NFLX): NFLX is a provider of subscription based Internet services for watching online movies and TV shows in the U.S. and internationally via Netflix.com, and for subscribers in the U.S. it also has a service to deliver DVDs and Blu-ray discs to their homes. Blue Ridge added $87 million to its $105 million position in Q3. NFLX shares have been a disaster lately, off by more than two-thirds from its highs in July last year, on a series of missteps from Management.
Analysts currently project earnings to fall off from $4.09 in 2011 to 3c in 2012. Besides Blue Ridge, other major funds that accumulated NFLX shares in Q3 included Goldman Sachs adding 1.1 million shares to its 0.2 million share prior quarter position, and JAT Capital Management adding 2.1 million shares to its 0.5 million share prior quarter position.
Select stocks that Blue Ridge is bearish on (see Table) include Canadian gold and copper mining company Ivanhoe Mines Ltd. (IVN), in which it cut $27 million from a $78 million prior quarter position; Brazilian bank holding company Banco Santander Brazil (BSBR), in which it cut in half its $86 million prior quarter position; specialty pharmaceutical company Valeant Pharmaceuticals International Inc. (VRX), in which it cut $112 million from a $482 million prior quarter position; Israeli developer of generic and branded drugs Teva Pharmaceutical (TEVA), in which it dropped its $110 million prior quarter position; manufacturer of NAND-based flash storage card products Sandisk Corp. (SNDK), in which it dropped its entire $231 million prior quarter position; and Bakes Hughes Inc. (BHI), a provider of wellbore products and technology and systems, in which it cut $52 million from its $121 million prior quarter position.
Fund and Manager Profile
John Griffin, like Stephen Mandel at Lone Pine Capital LLC and Lee Ainslie at Maverick Capital, is a Tiger Cub, meaning that he honed his investment skills while working for legendary hedge fund manager Julian Robertson at Tiger Management LLC. In fact, he is widely believed to have been Mr. Robertson's right-hand man. In 1996, like many other Tiger Cubs that started their own hedge funds, he left Tiger Management to start Blue Ridge Capital. Mr. Griffin received his undergrad degree from the University of Virginia and an MBA from Stanford Graduate School of Business. Besides managing Blue Ridge Capital, he also currently serves as an Adjunct Professor at Columbia Business School. Mr. Griffin is believed to be one of the highest compensated hedge fund managers, and it is reported that after a banner 65% return in 2007, he made $625 million that year.
The fund holds a concentrated portfolio of 62 positions, and almost two-thirds of its holdings are in large-caps, another 30% are in mid-caps, and small-caps account for the remaining less than five percent of its holdings. Its portfolio turnover is around 50% implying an average holding period of two years. Based on the most recent Q3 filing, we determined that their portfolio is over-weight in the services sector (30%), and it is under-weight in the consumer sector (0%).
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
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