Driehaus Confident In Apple, Still His Top Pick

Includes: AAPL, DHCP, TSM
by: Insider Monkey

By Jake Mann

We track around 450 of the 8,000-plus hedge funds in existence today, and within this upper tier lay some truly mammoth investors. Richard Driehaus is one such money manager that has had a storied career in the investing world, and being named to Barron's All-Century team is just one of the many accolades he has received over the years.

Our research has shown that, historically speaking, it has been a rewarding strategy to pay attention to the smart money's best picks (learn how here), and Driehaus easily qualifies one of this space's brightest gems. Using the latest round of fourth quarter 13F data from the SEC, we can determine how Driehaus was positioning the equity portfolio of his fund, Driehaus Capital Management, heading into 2013.

As we've mentioned before, he prefers to "buy good stocks of good companies and hold on to them until there are favorable changes." Here's his top trio.

Apple (NASDAQ:AAPL) is Driehaus's No. 1 equity holding, as it has been for three consecutive quarters. Over this nine-month time period, beginning with Q2 of last year, Driehaus has increased the size of his Apple position by about 4%. Interestingly, the fund manager did downsize his stake by 13% in Q4, but this move followed a 20% boost in Q3, indicating that he's still very confident in Cupertino's prospects moving forward.

Obviously, Mr. Market has been a bit more temperamental, as shares of Apple have lost more than 20% year-to-date, and are nearly 40% below their all-time high of $705.07. Yes, the tech giant's stock price is cheap at these levels - you'd have to be living under a rock to miss its PEG of 0.5 and forward earnings multiple below 9.0x - but there's reason to believe that a kick-start is needed before Apple can reach a fairer valuation.

A few "favorable changes" that Driehaus may be looking for include points originally outlined by Gene Munster last year, including: a dividend boost of some kind by this year's second quarter, a deal with China Mobile (NYSE:CHL) to provide the iPhone to its mobile subscribers, and an Apple TV by late 2013.

Clearly, value-stimulation is something that many permabulls have been asking Apple to consider for quite some time now, and the company's so-called "secret" hedge fund many be preparing for such a move. David Einhorn's "iPref" idea is also intriguing, but it's worth noting that there's still plenty here for growth-oriented investors to like.

The sell-side's five-year forecast calls for EPS growth a tick below 19% annually through at least 2017 - significantly above what's expected of key peers Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT), for example. Equally, as important is the upside that a new product offering like an "iTV" could establish - some analysts predict it to add $4.50 to EPS over the shorter run, and a global release could magnify this potential fourfold.

A recent story from Bloomberg also indicates that a rumored "iWatch" could be even better for business. The piece explains that, assuming a hypothetical scenario where Apple could grab 10% of both the wristwatch and TV markets, higher watch gross margins would be a boon to profitability.

Still, none of these growth factors have come to fruition just yet, leaving supporters like Driehaus out in the cold, so to speak. Aggregate hedge fund interest in Apple fell by 15% last quarter (among the funds we track), and 24 money managers were closing out their positions entirely. A few of these bears include Leon Cooperman, Dan Loeb and Stephen Mandel (see Mandel and Lone Pine's equity portfolio). Driehaus's time horizon is likely far longer than the first ten weeks of 2013, though, so we'll hold off on passing judgment just yet.

There are still plenty of ways that Apple can reverse its market losses, helping it achieve better value for investors, aiding Driehaus's portfolio in the process. Wall Street is still on board, as analysts' average price target represents almost a 43% upside from current levels. No matter what side of the aisle you fall on with regard to this stock, it's at least important to consider Driehaus's sentiment.

Taiwan Semiconductor (NYSE:TSM) and Walter Investment Management (WAC), meanwhile, round out the fund manager's top three equity holdings. Unlike Apple, Driehaus upped his stake in each of these companies by at least 30% last quarter, more than doubling the size of his Walter position.

Driehaus established his stake in Walter, the residential loan servicer with a mortgage portfolio and related insurance operations, in the third quarter of 2011. It was during this same three-month period that peers Jim Simons and George Soros also reported new positions in Walter, and shares have rewarded the move, popping over 130% since the start of 2012. A penchant for acquisitive growth has boosted investors' perception of Walter's growth prospects, and despite their outstanding appreciation over the past 14 months, shares still trade at a mere 10.2 times forward earnings.

Likewise, Taiwan Semiconductor is attractive for similar reasons. A forward P/E below 14.0x indicates that Driehaus's second largest holding is cheap, and its dividend yield of 2.2% places it in some rare territory. Just three other members of the 57-stock semiconductor (integrated circuits) industry sport a yield north of 2%, making this a solid play for income and value-oriented investors alike.

While this is just a snapshot of Richard Driehaus's top trio, it does give insight into his investment philosophy, and more importantly, how he is positioning himself for 2013 and beyond.

Disclosure: I am long AAPL, GOOG, MSFT.

Business relationship disclosure: This article is written by Insider Monkey's writer, Jake Mann, 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.