I like to analyze what Professional Managers are doing with their portfolios. As Ben Graham said, an investment operation is one which, upon thorough analysis, promises safety of principal and satisfactory return. Operations not meeting these requirements are speculative. I research very carefully each stock that I think of adding to my Portfolio. One starting point is evaluating what Hedge Fund managers are doing with their money
. Because they have large teams of analysts that spend the whole day analyzing fundamental data of each company, I have found over the years that studying new purchases or concentrated bets from the best managers is a great starting point for a methodical investment research. George Soros is one of the top managers in the Industry. While Soros is not actively managing the funds, he has a team of portfolio managers which are for sure intelligent people. I think it is very interesting to analyze what Soros Fund Management bought last quarter and the fundamental story of its purchase. I check his holdings via whalewisdom.com.
Macy's (M) - My Opinion: BUY
George Soros initiated a new position in Macy's last quarter.
One of the strongest points about Macy's was its May same store sales report. The company reported same store sales +4.2% vs. expectations for ~4.0% gain. Management expressed confidence in the business.
"The momentum in our business continued in May, and came on top of a very strong month last year. Growth in May 2012 came from stores and online, and across geography and categories of business.. We are seeing the ongoing benefit of the key strategies that have propelled our success over the past several years, including My Macy's localization, omnichannel integration and associate training to enhance customer engagement."
I like the fact that Macy's also reported strong earnings. In its last Q1 report, it announced Q1 (Apr) earnings of $0.43 per share, $0.04 cents better than the Capital IQ Consensus Estimate of $0.39 while revenues rose 4.3% year/year to $6.14 bln vs the $6.12 bln consensus.
Recently UBS initiated M with a Neutral rating and price target of $43, saying the company emerged from the recession with stores customized to local tastes, significantly re-energized employees, and a top notch e-commerce platform. The stock has outperformed the department stores group by 15pp YTD and valuation is now in line with the historical average, leaving less near-term stock upside.
When I check current M valuation, I see the stock is cheap according to historical standards and in comparison to its peers. Macy' s current trailing 12-month P/E is 12.2X, compared with 22X industry average and 14.0X for the S&P 500. Over the last five years, Macy's shares have traded in a wide range of 3.9X to 17.9X trailing 12-month earnings.
I think the stock is a buy considering that Macy's is a great Company in the department stores Industry, reporting great same stores results trading in very compelling valuations.
General Electric (GE) - My opinion: HOLD
George Soros initiated a new position in General Electric last quarter.
In a recent conference with GE management, they see different markets getting stronger but the overall context is still volatile while infrastructure demand is strong in many places which is strengthened by a U.S. economy that is getting slightly better. Management obviously admitted that European business is still tough but the Company is well positioned for double-digit earnings growth in Industrial & GE Capital. One strong point in the conference was management's expectations for margin improvements through the year. I think if that happens shares could go above $20, but it is not easy to predict. I also like when they mentioned that Cash flow generation is solid and they plan to resume GE capital dividend soon. I think GE is an investor-friendly stock that emerged stronger from the last recession.
Anotther strong point from GE is its GE Capital unit. GE Capital's first quarter earnings were $1.8 bln, flat from last year, but up 27% excluding the 1Q'11 Garanti sale impact. GE's management believes that GE Capital's strong business performance should continue for the year. Margins on new business continue to be attractive, with overall portfolio margins increasing. Real Estate turned its first profit since 3Q 2008. GECC's Tier One common ratio of 10.4% has never been stronger.
Infrastructure orders were a record high for the first quarter at $23.1 bln, up 20% from the prior year. Organic orders grew 14% in the first quarter, marking the eighth consecutive quarter of positive growth. Industrial growth market orders were up 21%. All businesses grew equipment orders at double-digit rates for the quarter.
"This quarter we witnessed broad-based strength in orders across all our Infrastructure businesses and in both equipment and services. We see encouraging leading indicators driven by global growth. Our strategy to invest in technology and global growth platforms continues to produce results with 11% organic Industrial segment revenue growth and 10% Industrial segment profit growth in the first quarter... We are positioned for double digit growth and our Industrial cash plan remains solid. We expect to return excess cash from GE Capital over the course of 2012, subject to review by the Federal Reserve."
In terms of valuation, General Electric trades at a 15.0x P/E, compared with the 35.6x average for its peer group and 14x for the S&P 500. Over the last five years, General Electric's shares have traded in a range of 4.7x to 19.6x trailing 12-month earnings. So, shares do not appear undervalued at these levels.
Why is GE a hold ? I like GE's management and its earnings numbers but I think shares will be highly volatile in the coming months as macro problems arise. I will stay on the sidelines and wait to see how European debt problem develops.
Yahoo! (YHOO) - My opinion: BUY
George Soros added to his Yahoo position last quarter.
I believe Yahoo is a clear turnaround story. I think that the multi-step agreement with Alibaba Group Holding to monetize its privately held stake in the Company is a strong catalyst for a recovery in YHOO shares. Oppenheimer wrote a bullish report explaining that under a base-case scenario, considering the Alibaba deal, they see a fair value for YHOO shares of $18, consistent with their target. If YHOO is able to distribute vs. sell Alibaba shares post IPO, this would add another $1 upside. Last, if Alibaba saw asset appreciation of 20% by its IPO and YHOO is able to exit Yahoo Japan on favorable terms, this would yield a low-probability upside that would imply a valuation of $24.
I think YHOO shares can go to $17-- that will represent a multiple of 14.5 x 2012 consensus earnings estimate. This estimate includes $2.75 per share in cash and $6.70 per share for the company's stakes in Yahoo Japan and Alibaba Group. What I do not have clarity in valuation terms is the difficulty in in valuing the interest considering is essentially a venture capital investment, not part of YHOO overall core business.
Valero (VLO) - My Opinion: HOLD
George Soros initiated a new position in Valero last quarter.
San Antonio, Texas-based Valero Energy Corporation is the largest independent refiner and marketer of petroleum products in the U.S. It has a refining capacity of 3.0 million barrels per day across 16 refineries located throughout the U.S., Canada and the Caribbean. Valero is also a leading ethanol producer with 10 ethanol plants in the Midwest that have a combined capacity of 1.1 billion gallons per
The company is also one of the largest independent retailers of refined petroleum products in the central and southwestern U.S. and in eastern Canada, with more than 5,800 retail outlets under various brand names, including Diamond Shamrock, Valero, Ultramar and Beacon.
I like the fact that Valero has sped up its investment level to reap benefits from the current high trend of oil price and timid gas price environment. The projects will be mostly completed by the end of 2012 and are expected to drive a significant improvement in earnings in 2013. I think that is one of the stronger points of VLO. Major capital investment, primarily hydrocracker units at Port Arthur and St. Charles should be a key driver for future growth this year, beginning in 2013. These projects position Valero to increase diesel production and diversify its market exposure.
The completion of significant projects is expected to improve free cash flow in 2013 by $1 billion, which will in turn fund share buyback. With the return of medium and heavy sour crude discounts, Valero is expected to return to profitability enabling for margin improvement.
I got encouraged by the recent beat in earnings. VLO reported Q1 (MAR) earnings of $0.31 per share, excluding non-recurring items, 3 cents better than the Capital IQ Consensus Estimate of $0.28; revenues rose 33.7% year/year to $35.17 bln vs the $32.74 bln consensus. Refining throughput volumes in the first quarter of 2012 were 2,555,000 barrels per day, an increase of 449,000 barrels per day versus the first quarter of 2011. The increase was mainly due to the acquisitions of the Pembroke and Meraux refineries. During the first quarter of 2012, significant turnaround and maintenance activity occurred in three of Valero's four refining regions, including plant-wide shutdowns at the Wilmington and St. Charles refineries.
Management expressed confidence in the business:
"2012 continues to look favorable for Valero. Our major hydrocracker projects continue on-budget and on-schedule with start-up of the Port Arthur unit planned in the third quarter and completion of the St. Charles unit planned in the fourth quarter. Also, the export market continues to be robust, and Valero has been exporting products on strong demand from international markets that have been paying a higher value than local markets. These export volumes have helped to offset weak domestic demand and contributed to higher operating rates at our refineries."
Despite the fact that the Company is investable, my main reason for staying away from VLO stock at this moment is the number of risks the Company faces from government regulations, fluctuations in refining capacity utilization, weather conditions, crude oil and natural gas prices as well as renewable fuel prices.
Analysts at Mornigstar target a $25 price reflecting a forward P/E of 6.85x based on consensus 2012 earnings estimate.
Gold (GLD) - My Opinion: BUY
George Soros added to his GLD position last quarter.
I think that Gold could continue to be a good investment considering that confidence in the Euro currency remains fragile after it earlier hit a near two-year low against the dollar. Dire German manufacturing and business climate data spooked investors already weighing up the risk of Greece leaving the eurozone.
But gold got a lift from International Monetary Fund data showing another rise in central bank gold holdings in April, after the largest purchase in over four years by the Philippines. The correlation of gold to the euro/dollar exchange rate held close to its highest in a month, meaning that a move in the euro was more likely to see an identical move in gold than as recently as two weeks ago. European investors are also more likely to sell their gold when the euro depreciates against the dollar to earn a higher profit on their currency position by taking profit on their dollar-denominated bullion position.
"The euro fell to levels not seen since Feb. 2010, when gold was trading around $1,100 an ounce," HSBC said in a note. "If gold moved entirely in lockstep with EUR/USD movements, we would expect the bullion market to be much closer to the $1,100 an ounce level." I think that GLD will sustain its current key technical levels and rise next months considering that big Central Banks are printing more money and some are buying Gold as a currency hedge.
I am a buyer of GLD at current levels.
Other Companies that Soros likes
The most interesting part of VVUS story is its new erectile dysfunction drug Stendra (avanafil) that some analyst think it would be worth ~$300 mln in the hands of big pharma. I believe Vivus' more important weight loss drug Qnexa will also be approved, however, there is significant commercialization risk unless the company is acquired by big pharma. I think that VVUS is a strong acquisition candidate but the stock will be continue sideways until July 17 which is the PDUFA date for Qnexa.
Boutique research firm MLV & Co. thinks that FDA approval of Stendra for the treatment of erectile dysfunction provides additional confidence that Stendra, which is now largely de-risked, will be able to attract a suitable marketing and distribution partnership on favorable terms to Company. I like Soros' bet in VVUS but it is a stock I will pass because I am not comfortable investing in the health care sector.
Recently I read a good report from Stifel, who were adding COF to the Stifel Select List as a top pick in consumer finance. They believe COF shares remain significantly undervalued relative to bank peers, but they believe this discount is poised to close. In the near term, Stiefel believe the financial upside from the ING and HSBC acquisitions will positively surprise and increase confidence in the earnings outlook. In 2013, Stiefel expect COF to adopt a more shareholder- friendly capital strategy that should further close the valuation gap. I think that the recent market volatility has created a good entry point into a strategic transformation that has significant upside potential.
In the last earnings report from COF, credit card and commercial bank, two segments relatively unaffected by the acquisition of ING and HSBC unit, performed better than expected-- primarily due to improved credit. I see COF as an interesting pick in the banking sector but similar to the health care Industry, COF operates in a sector that I prefer to stay away at this moment.