By Guan Wang
Louis Navellier is well-known for his "little book" - that's "The Little Book That Makes You Rich" for the uninitiated. In this Business Week best seller, Navellier describes his stock selection system. He explains how he is able to pick stocks primarily by taking a look at their fundamentals and buying pressures. According to Navellier, the "A" graded stocks returned 1267.9% for the past 13 years, compared with only 61% for the S&P 500 index.
However, Navellier's performance has not shown the same strength in recent years. In fact, over the past year, his returns have been a bit disappointing. Most of the funds under Navellier & Associates generated negative returns last year and underperformed their benchmarks - but Navellier is slowly recovering this year. To date, the largest 10 positions in his 13F portfolio at the end of 2011 have returned 14%, versus 11.4% for the S&P 500 index over the same period.
Table 1: Top 10 positions in Navellier's 13F portfolio as of December 31, 2011
CHIPOTLE MEXICAN GRILL INC
INTL BUSINESS MACHS
LAUDER ESTEE COS INC
DOLLAR TREE INC
FAMILY DOLLAR STORES INC
UTILITIES SPDR TRUST
CONSUMER STAPLES ETF
MEAD JOHNSON NUTRITION
The largest position in Navellier's portfolio is also its best performing. So far this year, Chipotle Mexican Grill Inc is up 22.28% - almost double the market. Navellier had $77 million invested in Chipotle Mexican Grill at the end of last year. A few other hedge fund managers were also in favor of the stock. As of December 31, 2011, there were 26 hedge funds reporting Chipotle Mexican Grill positions in their 13F portfolios, up from 20 hedge funds at the end of September last year. Jim Simons' Renaissance Technologies was the most bullish amongst the 350+ funds we track. It had $288 million invested in Chipotle at the end of 2011 (see Jim Simons' top holdings).
Chipotle has been expanding rapidly over the past decade. The company had just 227 restaurants at the end of 2002. By the end of 2011, that number had expanded to 1,230 units. Chipotle's annual compounded growth rate is about 21%. Sales of existing restaurants have also been rising at a fast pace. Sales of existing restaurants grew at a double-digit rate every year between 2002 and 2007. Comparable sales declined by 5.8% in 2008 due to the tough economy, but followed by a 2.2% increase in 2009 and a 9.4% increase in 2010. The company has also been boosting its EPS by repurchasing shares. It approved a $100 million share repurchase program in October 2008, which was completed in 2009. It approved another $100 million share buyback plan in 2010. Analysts expect Chipotle's earnings to grow at about 20% per year over the next couple of years. However, the stock seems to be overvalued. The company is expected to earn $11.08 per share in 2013, making its forward P/E ratio 37.5. We do not think its growth potential is high enough to warrant the price premium.
Mead Johnson Nutrition Co also returned over 20% so far this year. It is up 21.32% to be exact, beating the market by about 10 percentage points. Jim Simons is in favor of Mead Johnson too. RenTech had $113 million invested in this position at the end of 2011. Dan Loeb's Third Point is also a fan. The fund had $90 million invested in Mead Johnson at the end of the fourth quarter (see billionaire Dan Loeb's biggest bets).
In March this year, Mead Johnson teamed up with Danone to bid for Pfizer Inc (PFE)'s Wyeth infant formula. Nestle ultimately defeated the alliance, winning the bid for $11.85 billion. As a result, Nestle exceeded Mead Johnson and became the second-largest milk powder maker in China. But, Mead Johnson still has the chance of acquiring part of Pfizer's Nutrition business.
AutoZone Inc also delivered decent returns so far this year. It is up nearly 18% so far and it is still trading at reasonable valuation levels. Its forward P/E ratio is about 16 and its earnings are expected to grow at 16% annually. Edward Lampert, whose ESL Investments is the best performing hedge fund tracked by us this year, also had $965 million invested in AutoZone at the end of last year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.