Scout Capital Bullish On The Economy, But It Cut Google?

Includes: BUD, GOOG, PG, SBH, UPS
by: Insider Monkey

By: Andrei Braghis

Scout Capital Management is a hedge fund founded and managed by Adam Weiss and James Crichton. The approximate value of the fund's equity portfolio is $5.8 billion, and in the first quarter, the duo has made some intriguing moves The original 13F is here, and it's important to realize that retail investors can capitalize on hedge fund piggybacking, but they have to know where to look first, learn more here.

Top pick

Weiss and Crichton have followed hedge funds like Realm Partners and Arrowstreet Capital, and have invested heavily in Anheuser-Busch InBev (NYSE:BUD), adding 410% to their position from the end of 2012. The fund currently owns 4.5 million shares valued at $444 million, and the stock's price has advanced 10% in 2013 to a current value of a little over $97 per share. A dividend yield of 2.3% is solid, but this appears to be more of a value play, with a bit of growth thrown in for good measure.

Shares of Anheuser-Busch InBev sport a P/E of 20.7, significantly lower than the industry average of 30.40, and a forward P/E near 17.0 is slightly on the cheap side. Wall Street expects the brewer's EPS growth to average 9% a year over the next half-decade, and 14.7% next year alone. From a macro standpoint, an improving domestic economy is healthy for Anheuser-Busch InBev's bottom line, but it's also worth noting that gross margins are at their best levels since 2007.

The best of the rest

The second biggest position in the equity portfolio of Scout Capital is Sally Beauty Holdings (NYSE:SBH), a retailer of beauty supplies. The fund's management has increased its investment in Sally by 106% over the past quarter, and now holds approximately $408 million in the company. Sally's stock's price has been in an uptrend in 2013, surging 29% year-to-date, and analysts' third quarter outlook is rather rosy, expecting annual earnings growth of 13%. Another bet on an improving economy, we're beginning to see a trend here, and shares do trade at a modest 1.4 times sales - about 45% cheaper than industry peers like XO Group and Sotheby's.

Weiss and Crichton also added 450,000 shares to the fund's stake in United Parcel Service (NYSE:UPS), taking the total investment to 4.2 million shares worth a reported $360 million. The stock has appreciated 17% in 2013, with shares changing hands at a price of a little under $87 at present. Shares of the delivery and logistics company sport at a trailing P/E ratio of 97.96, significantly higher than the industry average of 36.30, but the company did beat the market's earnings expectations for its fiscal first quarter, with an EPS of $1.04.

The sell-side expects 11-12% bottom line growth annually over the next half-decade, and S&P holds a positive outlook on this space, citing "improving volume and yield trends on expanding shipping demand and improved pricing over the next year," particularly in Asia and the world's developing nations.

Scout Capital has done some spring cleaning, reducing its investment in Google (NASDAQ:GOOG) by 20%. The remaining position has a reported value of $341 million, and this cut comes as a bit of a surprise, since the stock price of the tech giant has advanced 26% year-to-date, recently breaking the $900 mark. Google's valuation isn't overly attractive at the moment, at 26 times earnings and 5.4 times sales, but earnings growth is still expected to remain steady over the intermediate- to long-term, with early estimates predicting 15-16% annual growth through at least 2017.

This compares favorably with Google's annual average over the past five years (19.5%), and if the company's stock is to surpass the vaunted $1,000-mark, it will likely be because it can surpass these expectations. A couple potential growth drivers that some investors may not be accounting for are: (1) a rumored "X Phone" completely developed by Google and Motorola Mobility, and (2) a Spotify-like music service that launched earlier this month.

Last but certainly not least is Procter & Gamble (NYSE:PG). Weiss and Crichton have halved the fund's stake in the consumer goods company, with its remaining position worth a reported $304 million. Procter & Gamble's stock price has increased by 17% year-to-date, but like Google, they aren't overly cheap at the moment, at 18 times trailing earnings. A dividend yield of 2.8% makes Procter & Gamble a solid entry in any investor's portfolio, while an earnings beat last quarter certainly has its fair share of bulls.

Still, a slight revenue miss ($20.6B vs. $20.7B consensus) in its latest financials has worried some investors, and it's possible that Scout Capital is one of them. What's more, S&P holds a neutral outlook on the household products sub-industry moving forward, as Procter & Gamble's inherently skinny economic moat isn't particularly exciting at the moment.

Final thoughts

Scout Capital is betting big on the consumer with higher-moat players like Anheuser-Busch InBev and Sally Beauty, and its investment in UPS is another sign that the hedge fund is generally bullish on the global economy moving forward. Still, cuts to its Google and Procter & Gamble positions warrant investors' caution, and if pressed to choose one downsize to buy into, we'd select Google, because of its staple of growth drivers moving forward.

Disclosure: I am long GOOG.

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