I think it is important to consider stocks that prominent investors recently added to their portfolios. As it is explained in one of the blog posts in Warren Trades, top value managers have more resources and information than any individual investor to analyze companies. In general, they do not buy stocks for daytrading or short term trading. Hedge funds with billions under management are long-term oriented, so tracking their picks is one important step when analyzing stocks. In this article, I will detail 6 companies that prominent institutional investors added to their portfolios in the recent quarter.
Procter & Gamble (PG)
Bill Ackman, founder of Pershing Square, initiated a position in PG that represents 17.89% of Pershing Square's portfolio. The recession of 2008 and the ongoing Euro-zone crisis have led to the possibility of protracted economic growth in the developed countries. The majority of P&G's revenues are from these countries, but there has been a shift in trend towards developing countries in recent years. In FY 2012, North America (US and Canada) and Western Europe together made up 58% of total revenues, compared to 62% in FY 2010. This trend may increase the company's exposure to risks specific to developing markets in the future.
Apart from a few exceptions, almost all of P&G's products have seen declining volumes in the developed regions in recent years. This is due to the combined effects of reduced consumer spending and increased product prices. Despite the relative underperformance of the company´s shares, PG´s stock trades very close to the peer group forward P/E multiples based upon consensus earnings projections. The stock is currently valued at 17.1 times projected 2012 earnings of $3.90, slightly below the average peer group multiple of 17.6 times, and 15.8 times projected 2013 earnings of $4.22, compared with the 2013 peer group P/E multiple of 16.2 times.
While I think that PG is a solid company with stable brands I stay on the sidelines until PG starts showing that its core businesses are turning around.
Seagate Technologies (STX)
David Einhorn, founder of Greenlight Capital, recently added to his position in Seagate Technologies. I think STX could be an interesting pick for dividend-oriented investors. Seagate has the biggest yield in the computer-data storage industry group. Seagate is one of the highest-yielding tech issues in the S&P 500, which it joined in late June.
Seagate didn't always reward shareholders with a dividend. It halted payouts for more than two years starting in early 2009. But Seagate announced the return of its dividend program in April 2011. The company cited its strong balance sheet, ability to generate cash and its commitment to maximize shareholder value. That is a bullish case for investors.
Seagate also trades at five times forward earnings, has an even lower five-year PEG of 0.2, and pays a 3.9% dividend yield. Seagate looks like a stock that marries low valuation multiples with high expected growth and dividend payments. I invested in STX when the stock was $12 and Einhorn just initiated his position. I followed a great recommendation from WarrenTrades newsletter, which I recommend to value-oriented investors.
Seagate Technology was recently downgraded to Hold at Stifel Nicolaus. As STX shares went up significantly, Stifel sees a more balanced risk/reward profile at current levels.
MGM Resorts (MGM)
David Tepper, from Appaloosa Management, initiated a position in the stock. Compass Point issued a very interesting report explaining what is happening in Macau, the strongest driver for big casino stocks. Compass noted a deceleration in the first half of the year and expects further declines in 2012. Overall, it estimates that the second half of the year will mark the reversal of a two year trend of continuously increasing estimates, so it recommends selling stocks like Wynn Casinos (WYNN), Las Vegas Sands (LVS) and MGM Mirage.
The bull case for MGM is that in Macau, MGM continues to benefit from robust market growth and drives a solid share of the total revenue. Macau is now the largest gaming destination in the world. The company intends to expand further into Asia and acquired properties in 2011 in Sanya on Hainan Island and Chengdu as well as a longer-term expectation to build properties in several other cities, such as Beijing, Shanghai, Tianjin and Nanjing (all in China). The company is also in an agreement to offer hospitality in Mumbai, India by building a Bellagio, an MGM Grand and an MGM Skywalk and also plans to set up a property in Vietnam, which is expected to open in 2013. So, MGM will expand in Asia, which will drive revenues and earnings not dependent on Las Vegas market.
Shares are undervalued. On a price to book value basis, shares of MGM Resorts trade at 0.7x, which is a significant discount to the industry average of 2.2x. Still, I'd stay away from MGM for now due to its leveraged balance sheet and future deceleration in Macau and other Asian destinations, given the current global macroeconomic uncertainty.
CoStar Group (CSGP)
BlackRock advisors initiated a position in the stock. I think that CoStar is one of the most interesting opportunities I am currently analyzing. The company has a unique business model that helps real estate brokers to get accurate data and key property analysis that no other company can provide. A combination of strong potential growth, a wide moat, and constructive technical action makes me interested in this company at current levels.
CoStar is a "must have" tool of information and analytic services for commercial real-estate brokers, developers, investors, and lenders as it's an innovative service provider that serves the industry with vital, up-to-date information on properties and tenants.
Todd Lukasik, analyst at Morningstar, explained in his report:
Participants in the commercial real estate industry rely on accurate and timely data to perform their jobs. Lenders and appraisers require comparable sales data for underwriting and valuations. Brokers, property managers and building owners require tenant information to track available space and tenant leasing needs. CoStar's nearly 1,000 researchers develop and update its database of information to support these functions.
By spreading the cost of its research staff and technology platform across a diverse client base, CoStar can price its service below the cost of collecting the data in-house. Its high customer retention rate (averaging 90% historically) coupled with annual rate increases (usually in line with inflation) have led to a solid recurring revenue base that should increase modestly over time.
In 2009, CoStar acquired two firms that expanded its offerings in terms of research and analysis. Its recent acquisition of LoopNet (the largest commercial real estate listing service online) and smaller acquisitions, are a great mix to CoStar offerings. I think CoStar can create cross-selling strategies and integrate those with the existing platform
Leucadia National (LUK)
Oaktree and DE Shaw bought the stock in the recent quarter. As of the close of trading on November 5, its market cap was $5.65 billion. With the exception of 2008, it hasn't been this low in more than six years. Its stock is up just 3.90% year-to-date, 22% below its 52-week high and 57% below its five-year high. It's definitely undervalued if you go by its history. Leucadia's stock trades at 0.9 times book value compared to 1.8 times for the S&P 500. Further, its average P/B over the past five years is 1.5. By price-to-book, anyway, its stock seems very cheap.
The stock is trading in the low range of its historical P/BV, showing a disconnect to LUK's holdings improving fundamentals. There is nothing fundamentally wrong in this company to justify this level of undervaluation. I do not know exactly which catalyst could drive the stock higher but I find a compelling reason to invest the fact that LUK fundamentals are right but its valuation does not represent that.
I think that the market is awaiting for some clarification into succession plans considering that both Cummings and Steinberg are old. I am sure that this won't be an issue for long term Leucadia's success because I trust both Cumming and Steinberg are smart enough to handle that issue appropriately.
Flir Systems (FLIR)
Flir Systems was recently purchased by prominent investors Wallace Weitz and Joel Greenblatt. The blog Warren Trades profiles these kind of non-researched stocks and sends alerts when to buy or sell them.
Flir strong backlog is one of the reasons to expect a rebound in shares. The firm orders for delivery within the next twelve months were approximately $565 million as of September 30, 2012, an increase of $67 million or 13% during the quarter. Backlog in the Government Systems division was $392 million, increasing $58 million or a strong 17% during the quarter. This metric points evidence that demand for Flir products will increase in the coming month. It is worth mentioning that for the past nine years, Flir Systems has acquired some of the largest and most promising firms in the industry such as Indigo, Intech Instruments and Omnitech. I am confident that Flir will exceed earnings expectations for the last quarter of 2012 and that catalyst will be the driver of an uptrend in the share price.