New York-based long-only hedge fund company Cantillon Capital Management, founded in 2003 by Munich-born William von Mueffling, manages over $5 billion in assets, including $2.05 billion in 13-F assets as per its latest Q1 (March 2012) SEC filing. Before founding Cantillon, Mr. von Mueffling was a star at Lazard Asset Management where he made a name in tech and telecom and helped put the bank's hedge fund business on the map. He then left it in 2003 to launch Cantillon in what was one of the biggest hedge fund launches of the time. The firm, with offices in New York and London, at its peak managed $10 billion in assets, mostly in long/ short strategies, before reverting to a long-only shop and returning all but $1 billion back to investors.
Cantillon is probably one of the most well-respected but least known businesses in the hedge fund world. They are basically value stock pickers, and employ a fundamental approach in making their investments. The fund holds a concentrated portfolio of just sixteen positions, with the top four positions accounting for almost half of the portfolio.
The following are Cantillon's most bullish picks that are also trading at a discount compared to their peers (see Table):
Google Inc. (GOOG): GOOG is the Internet's premier search engine. At $263 million, it is Cantillon's second largest position, including $10 million added during Q1, and $14 million added during the prior Q4. Other leading institutions with large bullish bets on GOOG in Q4 (the latest quarter for which most institutional filings are available) included UBS AG adding 0.9 million shares to its 0.6 million share prior quarter position, and mutual fund powerhouse Fidelity Investments adding 0.8 million shares to its 17.4 million share prior quarter position.
GOOG shares dove over 4% on Friday after earlier announcing a new share structure, as part of an effective 2:1 split, along with its Q1 2012 report after the close on Thursday. While there has been a lot of criticism of the new share structure, we believe that the underlying business fundamentals remain intact and would look at any meaningful pullback, especially back to the January lows near $560, as an opportunity to buy into this premium company.
GOOG, despite its massive six-fold move since its 2004 IPO, continues to trade at an attractive 12-13 forward P/E and 3.6 P/B compared to averages of 16 and 1.4 for its closest peer Yahoo! Inc. (YHOO), while earnings are projected to grow at a stellar (for a company this size) 18.5% annual rate from $36.06 in 2011, to $50.60 in 2013, compared with the sub-10% annual earnings growth rate for YHOO. The stock has been an excellent long-term performer, and given its market leadership, strong growth, and attractive valuation, It is likely that it will continue outperforming the market going forward.
Priceline.com Inc. (PCLN): PCLN, the pioneer of name-your-own price service, is a diversified online travel services company. It provides airline ticket, hotel room, car rental, vacation package, and cruise services through Priceline.com. Cantillon added $5 million in Q1 to its $119 million prior quarter position, a new position that it initiated in Q4 of 2011. Other leading institutions with large bullish bets on PCLN in Q4 (the latest quarter for which most institutional filings are available) included hedge fund guru and Tiger cub Stephen Mandel's Lone Pine Capital adding 0.8 million shares to its 0.7 million share prior quarter position, and Tiger cub Chase Coleman's New York-based hedge fund Tiger Global Management adding 0.8 million shares to its 0.4 million share prior quarter position.
PCLN stock has soared this year, up over 55% YTD, and up an astounding 30-fold in the last six years. Earnings growth has kept pace with the rise in the stock price, up from $1.37 in 2005 to $23.45 in 2011 and a projected $38.53 in 2013. Also, analysts continue to be optimistic, raising their FY 2013 estimates from $35.94 to $38.53 just in the last 90 days, and also a number of brokers have raised their targets well above $800, including a long-term 2014 price target of over $1,000 by Piper Jaffray. Thus, despite the huge run-up, the stock still trades at an attractive 19-20 forward P/E and 14.4 P/B compared to averages of 71.9 and 5.4 respectively for its peers in the Internet commerce group. While shares are a bit extended technically with the sharp rally this year, we continue to be bullish on the company and would look at any pullback in this premium company as an opportunity to buy, especially below the $650 range.
Oracle Corp. (ORCL): ORCL develops database and middleware software, and business application software and hardware systems for enterprises. At $240 million, including $9 million added in Q1, and another $13 million added in the prior Q4, this is Cantillon's fourth largest position. Other leading institutions with large bullish bets on ORCL in Q4 (the latest quarter for which most institutional filings are available) included Atlanta-based investment powerhouse INVESCO Ltd., with over $650 billion in assets under management, adding 6.7 million shares to its 59.9 million share prior quarter position, and Boston-based MFS Investment Management, with over $265 billion in assets under management, adding 6.3 million shares to its 80.4 million share prior quarter position.
ORCL recently reported a good Q3 (ending February) report, beating analyst revenue and earnings estimates; however, its Q4 revenue guidance was a bit light, and shares as a result have retreated after an initial positive reaction to the report. Its shares currently trade at 10-11 forward P/E and 3.3 P/B compared to averages of 40.1 and 4.6 for its peers in the computer software group, while earnings are projected to increase at a modest 8.6% annual rate from $2.22 in 2011 to $2.62 in 2013.
The following are additional companies that Cantillon is bullish about, accumulating shares in them in Q1 (see Table):
- Amazon.com Inc. (AMZN), a leading online retailer in North America and internationally, in which it added a new $86 million position in Q1;
- Analog Devices (ADI), that is engaged in the design, manufacture and technical support of analog, mixed-signal and digital signal processing integrated circuits used in industrial, automotive, consumer, communication and computer applications, in which it added $10 million in Q1 to its $232 million prior quarter position;
- Coca Cola Co. (KO), that manufactures non-alcoholic beverage concentrates and syrups sold to bottlers and fountain wholesaler, in which it added $10 million in Q1 to its $258 million prior quarter position;
- Philip Morris International Inc. (PM), a manufacturer of cigarettes sold worldwide under the Marlboro, LM, Parliament, Virginia Slims and other brands, in which it added $8 million in Q1 to its $208 million prior quarter position;
- cosmetic and personal care company Colgate Palmolive Co. (CL), in which it added $7 million in Q1 to its $182 million prior quarter position;
- Companhia De Bebidas Das Americas or AMBEV (ABV), a Brazil-based manufacturer of beer, soft drinks and other beverages in 14 countries in the Americas, in which it added $4 million in Q1 to its $86 million prior quarter position; and
- Banco Bradesco SA (BBD), a Brazilian bank providing a range of banking and insurance products services to individuals as well as corporations, and that operates a network of branches, ATMs, and special banking service stations and outlets in Brazil, and it also operates three branches and eight subsidiaries in New York, London, the Cayman Islands, Japan, Hong Kong, Argentina, Mexico, and Luxembourg, in which it added $3 million in Q1 to its $75 million prior quarter position.
Table
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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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