George Soros's Top Buys: 4 Potential Longs, And 1 I'd Avoid

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Includes: ESRX, EXPE, FCX, GOOG, WFC
by: Rash Menaria

Soros Fund Management LLC is one of the most successful and high-profile funds, managed by billionaire hedge fund manager George Soros. Soros returned an average of 30.5% per year between 1969 and 2000. More recently in 2007, 2008, and 2009, his fund generated a 32%, 8% and 29% return respectively for investors. The following is a list of Soros Fund Management's top buys from the last quarter.

Company

Ticker

Shares Bought Last Quarter

Google Inc.

GOOG

258,774

Wells Fargo and Company

WFC

1,095,400

Express Scripts Inc.

ESRX

516,465

Freeport-McMoRan Copper & Gold Inc.

FCX

370,300

Expedia, Inc.

EXPE

299,810

Click to enlarge

Source: 13F filing

I believe Wells Fargo, Google, Express Scripts and Freeport-McMoRan Copper are good long candidates among above stocks. However, I would avoid Expedia.

Wells Fargo and Company provides retail, commercial and corporate banking services primarily in the United States. It operates in three segments; Community Banking, Wholesale Baking and Wealth, Brokerage and Retirement.

WFC reported fourth-quarter EPS of $0.73 against the market consensus of $0.72. Revenue of $20.1 billion improved 6% quarter-quarter driven by mortgage results and the spread income fee. Net Interest Income was also better than expected and the loan growth was positive. A combination of lower funding costs and an increase in non-interest bearing deposits has resulted in better interest margins.

WFC remains one of the safest large-cap banking stocks with a relatively strong balance sheet. Its business fundamentals are going in the right direction, with improved core loan growth and healthy deposits growth. WFC's asset quality is stable and NPAs reduced by $879 million last quarter. Its capital ratios also continue to improve: Tier 1 common ratio at the end of Q4 was 7.49% under Basel III standards, up by 9bp quarter-quarter, while under Basel I it was 9.46%, up by 12bp quarter-quarter.

WFC has also entered into an agreement to buy back 5.6 million shares in Q1 2012. While high operating expenses are a concern, the management reiterated that expense improvement is expected to occur in 2012. I recommend going long on the stock from a medium- to long-term perspective.

Google Inc. is the world's #1 search engine and online advertising company. Google is trading at a forward PE of 12x. Its EPS forecast for the current year is 42.29 and next year is 49.62. According to the consensus estimates, Google's top line is expected to grow 21.60% in the current year and 19.90% next year. Google has a much undervalued asset in the form of Youtube, where only 3% of current videos are monetized through video advertising.

Given the secular shift of viewers from offline media to online, I believe online video advertising has a big potential. Google's recent announcement regarding launch of 100 online video channels on YouTube that would feature new original programming is a very important strategic step in the right direction in getting quality content to attract advertisers. Youtube is likely to become a major growth driver for Google in next few years. With over 18% earnings growth, cash pile of over $40bn and a secular tailwind in the form of online advertising growth, I find Google's current valuations very low.

Express Scripts Inc. provides a range of Pharmacy Benefit Management services in North America. It offers healthcare management and administration services on behalf of its clients which include health maintenance organizations, health insurers, third party administrators, employers, union sponsored benefit plans, workers compensation plans and government health programs.

I am bullish on ESRX--primarily due to the highly accretive Express Scripts - Medco (NYSE:MHS) merger. While the Federal Trade Commission is yet to approve the deal, recent indications suggest that things are going in right direction and the deal will most likely be closed in H1 2012. There is considerable upside potential to its EPS estimates due to the inherent synergies from the merger, especially in the specialty pharmacy business. Also, ESRX is not getting adversely affected from its ongoing dispute with Walgreen (WAG). ESRX reported a 97% retention rate despite the Walgreen dispute.

Going forward, weak utilization trends are expected to reverse as increased availability of low cost generics is likely to address lower prescription volumes. Further, rapid growth in e-prescribing penetration and robust biological pipelines should continue to drive revenues higher. The fundamentals of the base PBM business seems positive and ESRX is in a comfortable position to capitalize on opportunities around generic drug launches, higher electronic prescribing utilization and a growing specialty market as pricing remains competitive. I believe it's a good medium term buy.

Freeport-McMoRan Copper & Gold Inc. engages in the exploration, mining, and production of mineral resources. The company primarily explores for copper, gold, molybdenum, silver, and cobalt. It holds interests in various properties, located in North and South America; the Grasberg minerals district in Indonesia; and the Tenke Fungurume minerals district in the Democratic Republic of Congo.

I am bullish on Freeport as it is well positioned to benefit from continuing strength in the prices for copper, gold and molybdenum. Despite a tough macro environment, copper prices have increased 17% from mid-December to date. As the Chinese economy recovers and the restocking cycle starts, there is further upside potential for copper prices.

Freeport recently announced a 25% increase in its annual common dividends supported by strong balance sheet and cash flows. Also, with the recent refinancing of its debt structure, prospects for special dividends have increased. Further, the company is ramping up its idle capacity and pursuing expansion projects which is expected to increase its copper production by 25% by 2016. With a strong value and growth proposition I believe FCX offers attractive reward to risk in both the near and longer term.

Expedia, Inc. is an online travel company. The company makes available, on a stand-alone and package basis, travel products and services provided by numerous airlines, lodging properties, car rental companies, destination service providers, cruise lines and other travel product and service companies.

After TripAdvisor's (NASDAQ:TRIP) spin-off with Expedia, New Expedia's market position in online travel has become overly exposed to low growth, low margin Domestic Segment and Air Segments. Its positioning in other key markets such as Europe, APAC and Latin America is also second to Priceline.com (NASDAQ:PCLN). Going forward, Expedia's domestic hotel business could lose share to Priceline.com's agency hotel model. Its air and packaging business is also likely to remain weak due to rising airfares, weak growth in airline capacity and a push by air suppliers for direct-connect agreements.

Additionally, Expedia's margins are also likely to remain under pressure in 2012 given increased investment levels and an increasingly competitive environment (for example, Google's recent launch of flight search on its site). The company's recently reported results were not impressive either. Although, its EPS came above consensus, its revenue fell short of the street expectations. I recommend a short to medium term sell on Expedia given the above mentioned headwinds

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