I am interested in companies that have a solid future earnings power and are managed by competent people. The characteristic that most impresses me is a company's ability to grow sales and profits over the years at rates greater than the industry average. In order to do so, the company needs to posses products or services with sufficient market potential to make possible a sizable increase in sales for at least several years.
Here is a list of stocks that could be interesting for further research. I pay a lot of attention to stocks that powerful hedge funds managers buy because they have a team of analysts that spend the whole day interviewing customers and vendors from each company. Because I am unwilling to commit the time and energy to make tons of calls to individuals who are familiar with each company's businesses or to spend hours reading several financial reports, I rely on what each top hedge fund manager selected, and I give my opinion on their picks. In this case, I analyze Lee Ainslie top holdings. Ainslie is one of the best-performing hedge fund managers. I analyzed his holdings via whalewisdom.com. Ainslie founded Maverick Capital, a hedge fund with $10 billion in assets under management, one of the largest and most consistently successful hedge funds. Maverick relies on old-fashioned stock picking to generate its returns, investing only in equities and maintaining a balance of long and short positions.
I think that Qualcomm is a great technology stock, but it could experience some volatility in the coming months, considering low seasonal smartphone sales, but the stock should be a good pick considering a medium-term holding period. Recently, I read an interesting report from Canaccord Genuity, explaining that with limited supply impacting sales of some high-tier smartphones, coinciding with sequentially softer iPhone 4S sales, Canaccord anticipate more back-half-weighted seasonal smartphone sales during calendar year 2012. While Canaccord anticipates limited upside for Qualcomm's H2/F2012, they maintain their belief that QCOM is well-positioned for strong F2013 results. Finally, Canaccord believes QCOM should post strong earnings growth during F2013 due to stable royalty rates, strong connected tablet and smartphone sales, increasing market share for integrated chipsets, and strong 3G smartphone sales in emerging markets.
I think that semicounductor stocks could experience high volatility levels considering the current macro headwinds that include weakness and austerity measures hitting an already weak European market. Also, a cut in spending on U.S. carrier marketing and upgrade incentives, plus some 28nm industry constraints could limit demand at the high-end for 4G LTE smartphones. Combined, these headwinds will create a limited upside in the short-term for QCOM, but that could represent a buying opportunity going forward. I believe QCOM will gain share in 2012-13 due to its favorable vendor mix as the iPhone 5 and new Galaxy phones launch and with increased 4G LTE adoption.
The company reported strong earnings last quarter. QCOM's CEO noted that the record quarter was driven by strong demand from 3G and 3/4G chipsets. He explained that smartphone adoption remains one of the company's favorable trends. I see these dynamics continuing, although with high-end demand stronger than expected and QCOM's facing a 28nm supply constraint.
I think that Apple is a company that shows both short and long term potential growth, reasonable valuation and a super solid balance sheet.
The last Apple event (WWDC) was a continuation of the strong leadership that AAPL demonstrates.The highlight of WWDC was the unveiling of iOS 6, the operating system that powers the iPad, iPhone and iPod Touch. The most noteworthy new feature of iOS 6 is its maps application, which matches Google Maps, feature for feature, and other specifications. The one "disappointment" in the keynote was that, contrary to the predictions of many pundits, Apple did not specifically focus on the company's rumored Apple TV service. However, I think this announcement will come in the end of 2012.
The iPhone 4S remained the top-selling smartphone in the U.S. market despite gradual share losses at each carrier, with the iPhone 4S, which is now eight months old. Despite seasonally slower iPhone sales, I believe Apple is well-positioned for strong C2012/13 sales and earnings growth driven by new product introductions, including the new iPad, the pending refresh of MacBook Air/Pro, an LTE iPhone 5 by October and a potential iTV in 2013.
I see multiple catalysts ahead in calendar year 2012: 1) Macbook refresh late in the June quarter; 2) iPhone launch in September; 3) potential iTV launch late in the year; and 4) sustained momentum of iPad 3 as capacity constraints begin to ease.
Going forward, Apple has strong markets to explore and change, for example: 1) Payments: innovate how people pay with their cell phones and mobile devices, 2) Gaming: change the way we play games with the TV. I think Apple will change the way game consoles are actually made, 3) Movies & TV: Apple has potential to incorporate a movie service like Netflix into a potential iTV and a service for its whole ecosystem to change how we rent and watch movies.
Regarding AAPL valuation, shares trade at just 14x P/E, 10.6x forward P/E and a P/S of just 3.75x which is very similar to MSFT's P/S of 3.32x and lower than GOOG's P/S of 4.64x.
CVS Caremark (CVS)
CVS Caremark reported strong numbers in the last earnings report. The company reported Q1 earnings of $0.65 per share, excluding non-recurring items, $0.02 better than the Capital IQ Consensus Estimate of $0.63 while revenues rose a whoping 19.9% year/year to $30.8 billion vs the $30.29 billion consensus. I like the fact that the Company issued an upside guidance for Q2, forecasting EPS of $0.78-0.80, excluding non-recurring items vs. $0.74 Capital IQ Consensus Estimate. Also, CVS raised guidance for FY12, projecting EPS of $3.23-3.33 from prior guidance of $3.18-3.28, excluding non-recurring items, vs. $3.29 Capital IQ Consensus Estimate. CVS raised its earnings guidance for the full year 2012 to reflect the solid first quarter performance and the anticipated benefit to second quarter results of approximately $0.03 to $0.04 per share from the continuing impasse between Walgreens and Express Scripts. Management expressed an optimistic tone:
We posted an outstanding first quarter with strong results across the board. Results in both our retail and PBM segments came in at the high end of our guidance, while EPS exceeded expectations. We also generated $2.4 billion in free cash during the quarter, which places us comfortably on track to achieve our goal for the year.
CVS has a strong balance sheet. CVS exited the first quarter with cash and cash equivalents of $2.2 billion, compared with $1.42 billion at the end of fiscal 2011. The company generated over $2.4 billion in
free cash in the quarter. CVS expects to generate free cash flow of $4.6 $4.9 billion in 2012 with potential for further growth. The company's cash flow from operations guidance for 2012 remains at $6.2 $6.4 billion. Strong cash flow has enabled the management to return value to shareholders. In the first quarter, the company repurchased 18.1 million shares at a cost of $44.69 per share. Between dividends and share repurchases, CVS returned more than $1 billion to its shareholders in the first quarter. I am encouraged to note that the company expects to complete the remaining $2.2 billion of its current share repurchase authorization by the end of 2012. Between dividends and share repurchases, it expects to return more than $3.8 billion to shareholders in the four quarters of 2012.
Valuation is attractive. CVS current P/E is is 15.7x, compared to the industry average of 17.2x and 14.1x for the S&P 500. I am impressed with the improved performance of CVS Pharmacy Services segment for the fifth consecutive quarter. I am bullish of CVS longer-term potential, based on its retail execution, deployment potential and the strong 2012 generics cycle
Macy's reported very strong same store sales numbers which reflect that the business is solid. Macy's reported May same store sales +4.2% vs. expectations for ~4.0% gain. Management expressed optimism:
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.
The last earnings report was also strong. Macy's reported Q1 earnings of $0.43 per share,$0.04 better than the Capital IQ Consensus Estimate of $0.39 while revenues rose 4.3% year/year to $6.14 billion (in-line with last week's guidance) vs the $6.12 billion consensus. I think that the most important part came with management's guidance. The company reaffirmed guidance for FY13, forecasting EPS of $3.25-3.30 vs. $3.37 Capital IQ Consensus Estimate. I think that M emerged from the recession with stores customized to local tastes, significantly re-energized employees, and created a top notch e-commerce platform.
Regarding valuation, shares are not expensive. Macy's current trailing 12-month earnings multiple is 12x, compared with 30x industry average and 14x 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
Avago Technologies (AVGO)
I read a recent report from Sterne Agee Research, one of the leading technology sell side research firms. Sterne Agee says they did not hear much change in outlook from the companies in the Semiconductor group through multiple conferences in May, but there has been some cautious IT commentary. Nonetheless, as usual, semiconductor stocks have corrected 25-35% while the SOX is down 20%+. As in 2010 and 2011, Stern Agee believe that we could have a rally into year end from current depressed levels, as key valuations approach 2010-2011 inflection levels and fundamentals are better.
The last quarter report from Avago was quite weak. Avago Technologies reported Q2 earnings of $0.66 per share, excluding non-recurring items, $0.02 better than the Capital IQ Consensus Estimate of $0.64 while revenues rose 3.0% year/year to $577.0 million vs the $577.8 million consensus. I did not like the fact that management issued downside guidance for Q3 (Jul), forecasting Q3 sequential revenue growth of +3-6% which computes to $594-612 million vs. $615.3 million Capital IQ Consensus Estimate.
Avago also seemed relatively positive about the wireless business. It was widely known that QCOM's supply issues were going to impact the Apple business, but the impact seems better than feared. As Avago has been seeing strength in front end modules and apparently adding capex with the expectation of winning more FBAR filter business, this sounds pretty positive to me.
Apple is not the only earnings driver for AVGO. I can understand that to a point considering wireless is more than 40% of the company's revenue base and winning business in the upcoming iPhone and iPad (its first tablet win with Apple) is a big deal. While this is going to introduce some volatility into the numbers as Apple goes through its order-up/launch/anticipation cycles, that is on balance a good problem to have.
I like AVGO's progress in its industrial/auto business and the company is in good position to gain some real traction in 4G LTE phones with its FBAR filter.
Other stocks that Lee Ainslie invested
I think that DG is a sustainable earnings grower. I think that there are four key drivers of a sustainable premium valuation for DG. The sustainability is based on predictable annual EPS growth of mid-teens, resumption of gross margins expansion in 2H12, continued SG&A leverage, and taking market share from Walmart, as DG has a convenience advantage and the product price differential is negligible. I like this pick from Ainslie.
Regarding Youku.com, I like Apple iOS 6, OS X mountain lion to integrate Youku services. Apple announced that the next versions of Apple's OS X desktop operating system and iOS mobile operating system will integrate with services from YOKU. I won't buy YOKU right now but it is a stock to watch going forward.
Disclosure: I am long (AAPL).