George Soros's Portfolio Holdings: Nothing To Emulate

Includes: AAPL, DNDN, IOC, MSI, RL
by: Vatalyst

The man who broke the Bank of England, George Soros, Chairman of Soros Fund Management, is one of the most closely followed investors. As per “Forbes” ranking of 2011, Soros is the 48th richest man in the world.

Many investors seek to emulate him in hopes of achieving his great wealth; however, I take a different approach as a fundamental value investor. Below is my analysis of his five largest and longest-held positions. You'll see that his positions are nothing to emulate, and, in fact, by following his fund's picks you are risking capital with little to no reward. In other words, I am bearish, and therefore contrarian, on the Soros portfolio's ability to help you make gains in this market. Here is my analysis:

Ralph Lauren Corporation (NYSE:RL) is a luxury clothing and goods company with specialization in high-end casual/semi-formal wear and accessories for men and woman. The stock is at the top of our list of George Soros buy ideas with an impressive year-to-date (YTD) return of 33%. During the quarter ended June 30, 2011, Soros doubled his holding of RL (buying nearly 500 thousand shares) and now RL shares constitute 2.4% of his portfolio.

The company’s financial performance during the last five years reflects a state of solid stability. Though the topline has shown an average 9% growth during this period, more importantly, RL’s bottomline growth stayed ahead with a 13% CAGR which is a reflection of better business management and sound product portfolio adjustments. In addition, the cumulative free cash flows are 18% above than the cumulative earnings during these five years which is a strong testament of the cash generation ability of RL’s business model.

However, the scrip has milked out most of the gains of its sanguine financial status. With closest competitors like The Jones Group Inc. (NYSE:JNY) and Phillips-Van Heusen Corporation (NYSE:PVH) offering better (leading) price-earnings multiples of 7.0 times and 11.3 times than RL’s 18.8 times and JNY offering a 2% dividend yield compared to 0.5% of RL, the upside potential in the scrip is limited even with the expectation of a 15% earnings growth for 2013.

Being tagged by the Fortune magazine as the most “admirable” company of the world for three years in running, Apple Inc. (NASDAQ:AAPL) is an American company in the business of consumer electronics, computer software and personal computers. The stock has lost most of Soros’s predilection as during the second quarter of 2011, Soros sold 69% of its 230 thousand shares of AAPL (held at the end of March 2011). The stock’s price performance is phenomenal during the last five years as it soared more than five times since October 2006. But this performance is strongly backed by a staggering round of financial performance during the period.

Since 2005, not only has AAPL been able to grow its revenue by a sharp 36% annually, its net income growth has been able to outpace its revenue growth in an extraordinary magnitude, from a “marginal” $ 1.3 billion in 2005 to a towering $ 14 billion in 2010. And this is not enough as the company is expected to announce full year earnings of more than $ 25 billion for 2011 with consensus expectation of $ 31 billion profit in 2012.

From a valuation perspective, because of the nature of its business and continuous growth story, AAPL does not give any dividends currently. In terms of earnings, the potential in the scrip is still far from being over. At the Friday closing price, AAPL is priced at 12.8 times its 2012E earnings which is a 10% discount to Google Inc. (NASDAQ:GOOG)’s price earnings multiple of 14.1 times, and a 30% discount to Sony Corporation (NYSE:SNE) which is trading at a forward price earnings multiple of 18.2 times.

Motorola Solutions Inc. (NYSE:MSI) is a data communications and telecommunication equipment providing company based in America. Following major restructuring in 2011 and spin-off of its mobile phones and networks divisions, the company’s operations currently consists of two divisions; the enterprise division (comprising of communications offered to government enterprise mobility business) and the government division (producing public safety and government products).

The stock continued to be liked by Soros in the quarter ending June 2011. Soros bought an additional 1.18 million shares of MSI and overtook IOC to become the number 2 position in Soros' top ten holdings, constituting 4.7% of the total portfolio value. Adjusting for the spun-off divisions, MSI’s financial performance during the last three years remained under pressure due to several reasons.

With a stagnant topline averaging $ 7.7 billion per annum, the bottomline of the company crashed in 2008 reflecting a colossal $ 4.2 billion on the back of a $ 2.1 billion charge relating to goodwill impairment and loss on sale of investments and a massive $ 2.4 billion tax charge. However, the profitability of the company gradually improved after that and MSI registered a net income of $ 633 million in 2010.

The stock has clocked an impressive 21% return since the start of the year which has caused its glitter to diminish to a sizeable extent. With a 12% expected growth in its earnings in 2012, the stock is trading at a forward price-earnings ratio of 16.1 times and a dividend yield of 2%. However, its closest competitor Cisco Systems Inc. (NASDAQ:CSCO) offers a significant 42% discount in terms of its price related to earnings. Moreover, Honeywell International Inc. (NYSE:HON) is currently offering a better 2.7% dividend yield than MSI.

InterOil Corporation (NYSE:IOC) primarily engages in the exploration, appraisal, and development of crude oil and natural gas properties in Papua New Guinea. It is also involved in the refining and liquefaction of jet fuel, diesel, and gasoline. The stock is down 39% since the start of 2011, reaching its peak of $ 79.24 in March 2011. During the second quarter of 2011, Soros reduced his exposure in the scrip, selling 77 thousand shares which has caused a one-notch drop in IOC’s position in his top ten holdings (from second to third), but it still constitutes 4.2% of the entire portfolio.

As far as the financial chronology of the company is concerned, despite 11% CAGR in its revenue during the last five years, IOC has been able to surpass the zero-barrier only once in 2009 with a $ 6 million profit with negative free cash flows in each of these five years. Having the characteristic of a typical small-cap stock with an absent history of profitable operations, the scrip is attractively placed among its direct comparables. IOC is currently trading at 2.3 times its revenue in comparison to price-sales multiple of 6.6 times of Woodside Petroleum Limited (OTCPK:WOPEY) and 4.8 times of Santos Limited (OTCPK:STOSF). Furthermore, even in terms of enterprise value to EBITDA comparison, IOC is better placed with a reading of 2.3 times against 7.8 times of WOPEY.PK, and 4.7 times of STOSF.PK.

Dendreon Corporation (NASDAQ:DNDN) discovers and develops immunologically based therapeutic products for the treatment of cancer. The stock lost Soros’ attention considerably during the quarter ending June 2011 as he sold almost 45% of his DNDN holdings. But still, DNDN comprises 1.8% of his portfolio, with a total holding of 2.6 million shares. The stock comes at the bottom of my list with a whopping 73% negative return since the start of this year, most of which occurred in a single day.

On August 04, 2011, DNDN’s share price sagged by nearly two-thirds of its opening value after the company withdrew its revenue guidance for 2011 citing the implementation lag of its new “reimbursement paradigm”. Being an ultra small-cap stock with a very narrow revenue base and a business model with “make or break” characteristics, the company has been contemplating losses of varying magnitudes and almost zero topline (in four of the last five years).

As per consensus expectations, though the company is likely show more than a three-fold rise in its revenue in 2011 and another 76% rise in 2012, the bottomline is anticipated to remain under the breakeven level during this period, albeit improving substantially to a loss of $ 1.25 per share by 2012. In the absence of profitability in the company, even at the Friday closing price of $ 9.75, the stock seems expensive compared to its competitors, Progenics Pharmaceuticals (NASDAQ:PGNX) and Adolor Corporation (ADLR).

DNDN is currently trading at an enterprise value to EBITDA multiple of 11.3 times, much higher than PGNX and ADLR's numbers of 1.7 times and 1.28 times, respectively for the same variable. Likewise, even in terms of price-to-sales ratio, DNDN’s value for this multiple i.e. 11.9 times is considerably above the 2.67 times and 1.87 times for PGNX and ADLR, respectively.

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