Billionaire Richard Chilton's Top Stock Picks

Includes: AIQUF, DG, GRA, LKQ, SHW
by: Insider Monkey

By Matt Doiron

There are a few different ways that investors can use quarterly 13F filings from hedge funds to improve their performance. First, we have found that the most popular small-cap stocks among hedge funds generate an excess return of 18 percentage points per year (see more details about hedge funds' small-cap picks). Second, even though it might not be wise to blindly imitate the top picks of top investors they can be at least as useful sources of names as stock screens or CNBC. We recently looked at Chilton Investment Company's 13F for the fourth quarter of 2012; that fund is managed by billionaire Richard Chilton. Read on to learn more about Chilton's five largest holdings by market value at the end of December, according to the 13F, and compare them to previous filings.

W.R. Grace & Co. (NYSE:GRA) was the fund's top stock pick as the filing disclosed a position of 2.2 million shares in the $5.5 billion market cap specialty chemicals company. W.R. Grace may be best known for its cracking catalysts, which are used in the conversion of crude oil to transportation fuels. Earnings have been low recently but the market expects the company to do considerably better over the next two years; the sell-side is particularly optimistic given the forward earnings multiple of 14. Revenue was down 3% in the fourth quarter of 2012 versus a year earlier.

Chilton increased its holdings of Dollar General Corp. (NYSE:DG) by 64% to a total of 2.8 million shares. Dollar stores are not as popular in the market as they used to be, and Dollar General only trades at 16 times trailing earnings - only a small premium to Wal-Mart - despite less sensitivity to the broader economy (the stock's beta is 0.1) and double-digit growth rates of both revenue and net income last quarter from a year ago. Billionaire Stephen Mandel's Lone Pine Capital was also buying shares of Dollar General, with that fund's own 13F reporting ownership of almost 16 million shares (find more stocks Mandel was buying).

The fund also added to its stake in Airgas, Inc. (ARG), a $7.4 billion market cap manufacturer of gases and other chemicals for industrial and medical costumers, and closed December with 1.3 million shares. Airgas looks a bit expensive in terms of its earnings multiples: the stock carries trailing and forward P/E multiples of 23 and 18, respectively (the forward multiple is based on expectations for the fiscal year ending in March 2014). While earnings growth has been good, sales have not performed as strongly and so we're not particularly excited about Airgas.

Paint and finish company Sherwin-Williams Company (NYSE:SHW) was another of Chilton's favorite stocks. Sherwin-Williams is priced for growth at 25 times trailing earnings, but the company has been delivering decent growth rates and Wall Street analysts expect that trend to continue over the next couple years; the forward P/E is a considerably lower 17. At that price Sherwin-Williams would still need to achieve moderate growth rates in order to be fairly valued, so while it may be worth further research we would need to see a path to hitting its targets for the next two years and still having strong growth prospects.

LKQ Corporation (NASDAQ:LKQ), a $6.7 billion market cap replacement auto parts provider, rounded out the fund's five largest holdings. LKQ gets its parts from aftermarket and recycling sources, among others, and they are often used to repair cars damaged in collisions. Sales were up 30% in its most recent quarter compared with the same period in the previous year, and even though margins narrowed a bit the company was still able to increase its net income by 10%. A 39% rise in the stock price in the last year has brought LKQ to a fairly high trailing P/E, at 27, and despite the appeal of its industry it might be best to avoid it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.