I employ a bottom-up approach to stock selection, focusing on fundamental analysis that emphasizes a thorough understanding of the company, its prospects, its competitive environment, and whether the stock can be purchased at a reasonable price. I like to invest in companies familiar to me, or whose products are relatively easy to understand. The more familiar I am with a company, the better I understand the business and its competitive nature.
In the article I describe stocks I found interesting from Alkeon Capital's portfolio and explain some facts about each company. It is important to evaluate not only each company's fundamentals and the whole "story" but the quality of the management. I analyzed each of Alkeon's holdings using whalewisdom.com. Alkeon is a $3.6 billion long/short hedge fund founded by Panayotis Sparaggis, ex Credit Suisse Managing Director. With offices in New York, Hong Kong, and Boston, Alkeon Capital Management is a SEC registered investment adviser investing in global growth equities.
I like to analyze Alkeon's holdings because I know an analyst from the fund and I think they are one of the best value funds I know. The firm has six industry sector heads, most of whom have vast prior experience. They are the experts in their respective industries: consumer, health care, cyclical, retail, financial, and telecommunications, media, and technology. Mr. Sparaggis talks to them throughout the day about new and current stocks in the portfolio. With that input, Sparaggis ultimately has the final say. It really is a team culture. The sector heads are very experienced and talented individuals. Last year, the tenure of sector heads at Alkeon averaged seven years, each with investment or industry experience averaging more than 15 years. Every team has five to seven analysts typically covering 25 to 30 positions. The industry sector teams are supported by the accounting, emerging markets and quantitative teams. With 54 investment and trading professionals in all, the ratio of investment positions to staff is three to one. At the end of every day, Mr. Sparaggis or James Smith, the former chief equity strategist at Bear Stearns, who joined the firm in 2004, goes through the list of 100 to 150 stocks, and they come up with a plan of action based on their judgments and their conversations with the sector heads. Together, they decide whether to add to or reduce a position, buy new ones, or close one out.
EMC Corporation (EMC)
EMC reported better than expected results. The company reported Q2 (Jun) earnings of $0.39 per share while revenues rose 9.6% year/year to $5.31 billion vs the $5.3 billion consensus. Revenues from EMC's Information Storage business increased 7% year over year, which shows clear growth. Revenue from EMC's networked storage platforms grew 7% year over year. I think that the market was encouraged by the fact that EMC reaffirmed guidance for FY12, forecasting EPS of $1.70 vs. $1.73 Capital IQ Consensus Estimate and projecting revenues of $22.0 billion.
EMC is growing nicely in emerging markets. Geographically, EMC's revenues declined in EMEA by 1% while expanding in Latin America by 2% and emerging markets by 20%. EMC is the leader in the IT storage segment and could grow earnings in the high teens for the foreseeable future. I think EMC is still cheap, trading at 17x consensus earnings estimate for 2012, a discount to the peer group average of 22.6x.
Alkeon also invested in Cisco (CSCO). I prefer EMC to Cisco given that CSCO's business is more volatile than EMC's. I bought EMC at $20 by following a good recommendation from Warren-Trades newsletter.
Recently Baidu.com reported Q2 earnings of $1.24 per share, $0.13 better than the Capital IQ Consensus Estimate of $1.11 while revenues rose 62.4% year/year to $858 million vs the $855.9 million consensus. The company issued in-line guidance for Q3, forecasting Q3 revenues of $983-1009 million vs. $998.11 million Capital IQ Consensus Estimate.
Strong revenue growth was driven by a balanced increase in user traffic, customer base and pricing. I like the fact that management' s 3Q12 revenue guidance was above its prior and consensus estimates, suggesting strong monetization power. I think that BIDU management demonstrated strong execution amid softening macro conditions. The company is the Chinese leader in paid search and given its increasingly attractive valuation and a likely pick-up in macroeconomic growth in late 3Q/4Q I think shares could appreciate from current levels.
I think that penetration into lower tier cities is crucial to long-term growth in click traffic and cost per click. I believe that BIDU is my top pick in the China Internet space.
Alkeon also invested in Red Hat (RHT). RHT has a subscription model which benefits from the secular spending trends of data center refresh as well as the migration of UNIX to Linux.
Alkeon also holds a top position in Verisk Analytics. Verisk Analytics reported Q1 earnings of $0.47 per share, excluding non-recurring items, $0.03 better than the Capital IQ Consensus Estimate of $0.44 while revenues rose 10.8% year/year to $346.5 million vs the $349.57 million consensus.
The company's decision analytics business helps customers predict future losses, price risk, detect fraud and quantify losses that have already occurred.
Verisk is good at building the software to analyze data and once VRSK has built the software, the company sells it multiple times to different customers. The majority of Verisk's revenue is subscription based, similar to RHT. Verisk is the leading supplier by far of risk assessment and analytics to the commercial property and casualty industry. It's the go-to source for more than 90% of property and casualty insurers.
The industry's five-year down cycle has been turning up lately and should generate more revenue for Verisk over the next few years. But Verisk still grew during the soft cycle because of its diversified offerings, such as helping insurers project losses from storms. For example, Verisk also sells mortgage products to large underwriters, such as JPMorgan Chase (JPM), leveraging its huge database on commercial properties.
I like VRSK because it is exposed in two key trends in technology: analytics and outsourcing.
Alkeon also invested in Teradyne (TER). TER reported revenue growth in the first quarter that came after three consecutive quarters of falling revenue. In the most recent quarter, revenue increased 5.2% year-over-year. Prior to that, revenue had been falling; it dropped 7.8% in the fourth quarter of the last fiscal year, 31.4% in the third quarter of the last fiscal year and 9.7% in the second quarter of the last fiscal year. While being profitable for the last eight quarters, the company has seen net income slip over the past four quarters by an average of 7.5% year-over-year. The company was hit the hardest in the most recent quarter as its net income dropped by 64.6%. I would stay away from TER.