By Guan Wang
Many hedge funds start small. Some of them perform poorly and finally leave the industry, while others grow continuously and become large asset managers. Ray Dalio's Bridgewater Associates falls into the latter category. Started in a two-bedroom apartment, the firm has grown to manage approximately $120 billion worth of assets globally and has about 1,200 employees. Founded in 1976, Bridgewater has been recognized as one of the best-performing hedge funds. Last year, when the average hedge fund was down about 4%, Bridgewater finished the year with a gain of 23%.
A few days ago, Bridgewater released its 13F holdings as of March 31, 2012. Let's take a look at the major positions held by this successful hedge fund.
Bridgewater's largest non-ETF position at the end of March was Hewlett-Packard Co (HPQ). The fund nearly doubled its stakes in the company during the first quarter. It reported owning $41 million worth of HP shares at the end of March. HP is trading at only 4.8X its 2013 earnings, a discount to the industry average of 12. However, the company is currently faced with various problems. The demand for computer hardware in Europe and Asia-Pacific is shrinking, which is expected to weaken HP's revenues. As a result, the company has had to struggle to invest in R&D and cut costs in order to boost sales and earnings.
HP is also faced with severe competition from Apple Inc (AAPL) and International Business Machines Corp (IBM). As a matter of fact, we think these two stocks are better options than HP, even though their multiples are relatively higher. IBM is trading at 11.9X its 2013 earnings, while Apple's 2013 P/E ratio is 9.8, but they also have stronger growth potential compared with HP. IBM's earnings are expected to grow at 10% per year and Apple's expected earnings growth rate is above 20%, versus 7% for HP. Billionaire Warren Buffett is bullish about IBM. Berkshire Hathaway had $13.4 billion invested in IBM, and IBM is the only technology stock in Buffett's portfolio (check out Warren Buffett's top stock picks).
Dalio seems to be bullish about the technology sector in general. Bridgewater also had $34 million invested in Oracle Corp (ORCL) and another $22 million invested in Microsoft Corp (MSFT) at the end of the third quarter. In fact, they were the second and third largest non-ETF positions in Bridgewater's portfolio at the end of March. The fund had increased its Oracle position by 29% and its Microsoft position by 2200% over the first quarter.
Both stocks look attractive. Oracle is trading at 10X its 2013 earnings and its earnings are expected to grow at 13.7%, while Microsoft's 2013 P/E ratio is 9.6 and its expected earnings growth rate is 8.8%. Microsoft was also bought by an insider this month. Director Stephen Luczo purchased 16,000 shares at $30.72 per share on May 8. Hedge funds show great interest in Microsoft as well. Ninety-five hedge funds reported to own this stock at the end of last year, including David Einhorn's Greenlight Capital, which had $241 million invested in Microsoft at the end of March (check out David Einhorn's top stock picks).
Over the first quarter, Dalio also largely boosted his stakes in Rockwell Collins Inc (COL), increasing his bets by 230%. As of March 31, 2012, Bridgewater had $20 million invested in this position. A few other hedge fund managers also like Rockwell. For instance, Israel Englander had $5.2 million invested in this stock at the end of the first quarter.
Rockwell operates its business in two segments: commercial systems and government systems. Over the past year, its government segment has generated about 58% of the company's total revenues. However, the US defense budget is expected to decline by at least 2.5% in 2012, which will negatively influence Rockwell's government segment. On the other hand, Rockwell has been doing a great job in maintaining strong margins, which will partly offset the negative impact of the declining budget.
Rockwell has a strong gross margin of 40.50% and its net profit margin of 13.90% is also above the industry average. We also see robust growth in its commercial segment as the demand for large commercial aircraft and business jet is growing steadily. S&P projects Rockwell's commercial segment to have a strong growth about 13% in FY 2012. With regard to valuation, Rockwell is attractively priced at 10X its 2013 earnings, versus the industry average of 14.
Dalio also invested $20 million in Tesoro Corp (TSO). Director Jim Nokes bought 3,000 shares of Tesoro at $21.807 per share on May 7, indicating some form of perceived value of the stock. Tesoro is currently trading at $22.41 per share, or 5.7X its 2013 earnings. The valuation level looks appealing. A few other money managers, such as David Dreman and Ken Griffin, are also in favor of this stock (check out David Dreman's top stock picks).