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 consider 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. In this case I analyze what John Burbank from Passport Capital, Leon Cooperman and other investors have bought in the past months. I analyzed their portfolios using whalewisdom.com.
Procter & Gamble (PG)
John Burbank from Passport Capital initiated a new position in Procter & Gamble last quarter.
I like PG but I prefer Colgate (CL). In case of PG, its volume growth slid to zero in 3Q12 from +1% in 2Q12, while pricing moved higher to +5% from +4% in F2Q12. I did not like the fact that PG admitted its innovation is inadequate, especially in beauty, and cited competitive pricing pressures in several areas. PG plans to turn back price increases in six category/countries, including oral care, shaving, automatic dish and laundry. With higher top and bottom line growth at roughly the same valuation, I view CL shares as a more compelling buy opportunity. I still like PG but I recommend CL.
PG appears to have been disproportionately impacted by sluggish market growth, exacerbated by market share losses which imply that the company's problems are more structural in nature. That is why, I think that shares will remain under pressure until management starts solving these problems.
During the past several years, Procter has sold noncore businesses and changed its product portfolio toward more value offerings, significantly increased spending to reclaim and defend market share, and aggressively expanded in overseas markets. However, earnings growth has been absent. Management has been active reducing expenses. For example, during last February, management announced a massive $10 billion cost savings plan that will increase earnings and cashflow. I think that problems related to slowing growth rates, competitive pricing, and negative foreign exchange persist.
PG reported Q3 earnings of $0.94 per share, excluding non-recurring items, $0.01 better than the Capital IQ Consensus Estimate of $0.93 while revenues rose a modest 1.5% year/year to $20.19 billion vs the $20.38 billion consensus. The market did not like the downside guidance for Q4, forecasting EPS of $0.79-0.85, excluding non-recurring items, in comparison to $0.93 Capital IQ Consensus Estimate.
While I think that PG has strong brands and a solid business model, shares will remain volatile and it will take time until PG's management shows the market they are turning the business around.
American International Group (AIG)
Leon Cooperman from Omega Advisors initiated a position in American International Group last quarter.
I like AIG because the stock is attractively valued. After its excessive risk-taking necessitated a dramatic bailout from the federal government, AIG is now in the process of rewarding common shareholders through buybacks and share repurchases. I think that after "cleaned" its balance sheet, the "new" AIG will be a smaller insurance organization, having some businesses that were part of its global growth potential. I think that AIG will have return to its former dominant position.
Having sold off most of its Asian life insurance subsidiaries, AIG consists of Chartis (P&C), SunAmerica, and financial services. Chartis accounts for about half of AIG's revenue, SunAmerica about 20%, and the rest is primarily in financial services, which contains aircraft leasing, capital markets, and mortgage insurance. Chartis represents AIG's best chance at achieving growth in global markets because the brand is solid and the business is growing in emerging markets. SunAmerica is based in the U.S., as are most of the financial services division's activities.
In the recent earnings report, AIG showed good numbers. AIG reported Q1 earnings of $1.65 per share, $0.74 better than the Capital IQ Consensus Estimate of $0.91. AIG shareholders' equity totaled $103.5 billion at March 31, 2012. The most important part were its book value per common share which grew approximately 8 percent during the first quarter to $57.68 per share, including accumulated other comprehensive income. AIG trades with a P/BV of 0.52x. Liquidity is very strong, AIG parent liquidity sources amounted to approximately $12.4 billion at March 31, 2012.
Chuck Akre bought Visa and MasterCard (MA) last quarter. I like both stocks.
Despite the near-term challenges facing the whole U.S. debit business, Visa has raised its fiscal 2012 EPS guidance in each of the past two quarters. They now expect 22% growth for the year, far from the doomsday scenario feared when the Dodd-Frank law was first signed in July 2010. There is no global economic slowdown showing up in Visa's results, at least not through the end of April. In comparison to MasterCard, Visa lacks direct exposure to Europe.
I think that both MasterCard and Visa are well positioned to capture the secular growth in transaction volumes as cash payments transition to plastic, mobile, and e-commerce payments. In addition, with more than 60% of revenues derived from outside the U.S., where cash and check usage is higher, and an opportunity to increase debit market share post-Durbin, both V and MA are well positioned to generate high growth rates.
In the recent earnings report, Visa showed great results. V reported Q2 earnings of $1.60 per share, excluding non-recurring items,$0.10 better than the Capital IQ Consensus Estimate of $1.50 while revenues rose a strong 14.8% year/year to $2.58 billion in comparison to the $2.48 billion consensus.
Regarding its guidance, Visa affirmed its financial outlook for 2012. Management expects annual net revenue growth in the low double digits while client incentives as a percent of gross revenues growing 17% to 18% range.
I recommend V given its higher than expected estimates in light of strong volume trends as well as a waning of extraneous valuation overhangs (Durbin, Merchant Litigation). Fundamentals are benefiting from solid US retail sales trends and continued international volume strength. I think that shares remain attractive although I expect share appreciation to largely track earnings growth from here with limited further multiple expansion.
Wallace Weitz bought Hewlett-Packard last quarter. He added to his existing position.
Hewlett-Packard is a clear turnaround play. In the last quarter, HPQ reported Q2 earnings of $0.98 per share, $0.07 better than the Capital IQ Consensus Estimate of $0.91 while revenues fell 3.0% year/year to $30.69 billion vs the $29.91 billion consensus. I think that the market got upbeat with HPQ restructuring strategies. Hewlett-Packard launched a multi-tear restructuring to fuel innovation and enable investment expecting to save $3.0-3.5 billion until 2014. Also, the company issued upside guidance for FY12, forecasting EPS of $4.05-4.10, excluding non-recurring items, in comparison to $4.04 Capital IQ Consensus Estimate and at least $4.00 previously. That made shares rise almost 7% after earnings.
I think that HPQ's management appear to be stabilizing the business, making solid progress in many areas, but haven't turned the corner yet. Multi-year layoff are just a reallocation of resources and while I believe the strategy is logical, it should take time for desired effect.
On a macro perspective, I remains cautious about the environment globally for both consumer and commercial spending. I also believe that the pricing environment remain to be highly competitive.
I am cautiously optimistic regarding HPQ. Its results appear to be stabilizing and while the company wouldn't say they've turned the corner, they are making progress.
Michael Price added to his position in Intel last quarter.
I think that the whole Semiconductor industry will be affected by the "risk-off" trade despite what still seem to be gradually improving fundamentals. I recommend investors to be in no rush to catch a "falling knife" and I wouldn't be surprised to see the Semiconductor Index trade down to the 320-330 range.
I believe the macro backdrop in Europe is now starting to become a drag on prior 2Q outlook. I think that Intel could be affected by a weak macro environment considering the fact that major hardware companies including Lenovo, Dell and Hewlett Packard have cut their 2Q notebook build estimates. The lower build rate is attributable to smaller-than-expected May shipments, poor visibility for June, and a possible inventory destocking in key markets like China and India.
While INTC has been executing well and is a company I like, I think the PC and Enterprise markets are starting to slow again given macro uncertainties, and a slower Win8 uptake in the channel, versus more optimistic consensus estimates. The growth from Ultrabooks and new Handsets-Tablet markets is more challenging for INTC. While INTC has been able to capture better value and average selling prices in the PC market with integration, I consider increasing wafer costs and declining average selling prices pose a different set of challenges in the smartphone-tablet market for the company.
To sum up, I think INTC is one of the best quality technology stocks but I remain on the sidelines considering the current macro environment and competitive pressures.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HPQ over the next 72 hours.