Top Undervalued High Conviction Outperforming Buys From Acadian's $13 Billion March Filing

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 |  Includes: CF, DISH, GFI, MPC, MRK, NLY, SU, SWY, T, TSM, TTM, VALE
by: GuruFundPicks

Boston-based Acadian Asset Management LLC, founded in 1977, is a global equity manager and wholly owned subsidiary of London-based financial services company Old Mutual. Besides Boston, it has offices in Singapore, London and a joint venture in Australia. It has $49 billion in assets under management, including $12.8 billion in 13-F assets, per its latest March 2012 filing with the SEC last week. The firm employs a rigorous quantitative and bottom-up approach in making its investments, using stock fundamentals such as earnings trend and projections in making its selections.

The assets are well-diversified into over 1,060 positions, with over two-thirds deployed in large-caps, another 15%-20% in mid-caps, and the remaining 15% in small-cap equities. We analyzed Acadian's holdings in its Q1 2012 13-F to determine its highest conviction bets, selecting the largest buys and sells in size, where the buy/sell is also a significant proportion of its prior quarter position in that company. Based on that analysis, the following are two of its high conviction bullish moves that are also trading undervalued compared to their peers, and have outperformed YTD relative to the market and their peers (see Table):

Taiwan Semiconductor ADR or TSMC (NYSE:TSM): Taiwan Semiconductor is the world's largest dedicated IC foundry manufacturing logic and mixed-signal ICs for fabless semiconductor companies and integrated device manufacturers. Acadian added $68 million in Q1 to its $12 million prior quarter position. Other leading institutions with large bullish bets on TSM in Q4 (the latest quarter for which most institutional filings are available) included mutual fund powerhouse Fidelity Investments adding 10.3 million shares to its 25.6 million share prior quarter position, and legendary billionaire investor Ken Griffin's Chicago-based hedge fund Citadel Advisers adding a (almost) new 2.3 million share position.

TSM shares are up about 19% YTD, currently trading at multi-year highs, compared to the 9% rise for the general market and the also for the average semiconductor stock. They are up slightly after the company reported a strong Q1 (March) quarter the week before last, on Thursday, beating analyst revenue and earnings estimates. The stock trades at a current 17.8 current P/E on a TTM (trailing-twelve-month) basis and 3.5 P/B compared to averages of 35.7 and 4.4 for its peers in the semiconductor foundries group, while earnings are projected to continue rising at a strong pace, at 15.5% annual growth rate, from 87c in 2011 to $1.16 in 2013. Besides its attractive valuation, on a relative basis, TSM also sports a dividend yield of 2.7% compared to the 1.4% average for its peers in the group.

CF Industries Holdings (NYSE:CF): CF is a manufacturer of phosphate fertilizers, including urea, ammonia and urea ammonium nitrate in North America. Acadian added $36 million in Q1 to its $86 million prior quarter position. Other leading institutions with large bullish bets on CF in Q4 (the latest quarter for which most institutional filings are available) included diversified financial services provider Ameriprise Financial, with $131 billion in 13-F assets, adding 0.8 million shares to its 0.4 million share prior quarter position, and Atlanta-based investment powerhouse INVESCO Ltd., with over $650 billion in assets under management, adding 0.4 million shares to its 0.2 million shares prior quarter position.

CF shares have been in a multi-year bull run, rising to four-fold from the lows in 2008-09, and currently forming a tight 16% consolidation pattern at all-time highs. The stock is up 27% YTD compared to 9% for the market and 6% for the average basic material stock over the same period.

The company recently reported its Q1 (March) last week, on Thursday, beating analyst revenue and earnings estimates ($6.06 v/s $4.83), cautioning however the near-perfect conditions of warm winter weather and a myriad of other factors that made the outperformance possible will be hard to exceed or even replicate in the near future. However, it expects the low natural gas prices to continue to benefit its bottom-line for the rest of the year. Its shares currently trade at an attractive 7.8 current P/E on a TTM (trailing-twelve month) basis and 2.4 P/B compared to averages of 18.4 and 4.2 for its peers in the fertilizer group, while earnings are projected to fall from $22.88 in 2011 to $20.58 in 2013.

The following are additional companies that Acadian is bullish about, accumulating shares in them in Q1 2012 (see Table):

  • Safeway Inc. (NYSE:SWY), that is a food and drug retailer, with almost 1,700 supermarkets in the U.S. and Canada, in which it added a new $135 million position in Q1;
  • Suncor Energy Inc. (NYSE:SU), that is an integrated energy company, engaged in the development of petroleum resource basins in Canada's Athabasca oil sands, in which it added $128 million in Q1 to its $32 million prior quarter position;
  • Merck & Co. (NYSE:MRK), a research-driven global pharmaceutical company engaged in developing prescription drugs to treat asthma, osteoporosis, cardiovascular, metabolic and other disorders. It also develops vaccines, biological therapies, animal health, and consumer products, in which it added $52 million in Q1 to its $173 million prior quarter position;
  • Marathon Petroleum (NYSE:MPC), engaged in the refining, transporting and marketing of petroleum products, and operating six refineries in the Gulf Coast and Midwest regions that refine crude oil and other feed-stocks, and distributing the refined products through barges, terminals and trucks, in which it added $46 million in Q1 to its $44 million share prior quarter position; and
  • Indian company Tata Motors Ltd. ADS (NYSE:TTM) that makes passenger cars, commercial vehicles, utility vehicles and accessories, in which it added $44 million in Q1 to its $35 million share prior quarter position.

The following are Acadian's high conviction bearish picks, based on its Q1 selling activity (see Table):

  • DirecTV Inc. (DTV), that provides digital television entertainment in the U.S. and Latin America, providing direct-to-home digital TV services, as well as multi-channel video programming distribution services in the U.S., in which it cut $118 million in Q1 from its $218 million prior quarter position;
  • Rio De Janeiro, Brazil-based Vale SA (NYSE:VALE), that is one of the world's leading mining companies, and specializes in the mining of iron ore and pellets, manganese, alloys, gold, copper, potassium, and kaolin, in which it cut $115 million in Q1 from its $355 million prior quarter position;
  • leading mortgage REIT Annaly Capital Management Inc. (NYSE:NLY), in which it cut $81 million in Q1 from its $100 million prior quarter position;
  • Gold Fields Ltd. (NYSE:GFI), a South African mining company engaged in the exploration and extraction of gold in South Africa, Ghana, Australia and Peru, in which it cut $49 million in Q1 from its $82 million prior quarter position; and
  • DISH Network Corp. (NASDAQ:DISH), that provides direct broadcast satellite subscription TV services nationwide, in which it cut out completely in Q1 its $35 million prior quarter position.

Table

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.

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

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