George Soros' Top Picks

Includes: DIS, ESRX, GE, M, PEP, WMT, WPRT
by: FAF Research

Eighty-year-old George Soros is a Hungarian-American hedge fund manager who became known as "the Man Who Broke the Bank of England" after he made $1 billion in 1992. Soros graduated from the London School of Economics in 1952. After graduation, he started his career in the London merchant bank of Singer & Friedlander. In 1956, he moved to New York City and his career took off. He earned large profits from investments and currency speculation. According to Forbes, George Soros is ranked 35th on the list of the world´s richest people, with an estimated net worth of $14.2 billion. In this article I analyze Soros Fund Management top holdings.

Wal-Mart (NYSE:WMT)

Wal-Mart is a stock I started buying at $50, following a recommendation from Warren-Trades newsletter. I like WMT because the company is expanding internationally. Wal-Mart is showing record growth in its emerging markets stores and that was reflected in the last earnings release. I also like the expansion that WMT is experiencing in its online segment. Wal-Mart, which is the sixth-largest Internet retailer, has been focusing on expansion of its presence in the online business. It has already developed its online businesses in U.S., U.K., Canada, and Brazil. Wal-Mart has also increased its controlling stake to 51% in Chinese Internet retailer Yihaodian in order to further strengthen its position. Wal-Mart has improved its access
to Chinese consumers who increasingly use smartphones and social media to shop. Besides, Wal-Mart also acquired the Vudu streaming video service in February 2010, and technology company Kosmix in April 2011, demonstrating its commitment to e-commerce and goal of offering customers a unique shopping experience. I think that WMT is a buy opportunity because its strategy of online expansion is going very well.

The company reported a solid international performance in the last earnings release and growth in same-store sales. Wal-Mart delivered its fourth consecutive quarter of positive comparable sales. This is evidence that the business is solid. The company forecasts U.S. Q3 comparable store sales of +1.0-3.0% and Sam's Club comparable store sales of 3.0-5.0%, both exceeding market expectations. Management sounded optimist in the earnings conference call:

Our comparable sales momentum continued through the second quarter, with July being one of our strongest months. All three geographic business units and all store formats had positive comparative sales.

WMT is a stock I hold in my portfolio and recommend to my clients.

General Electric (NYSE:GE)

GE is another company I recommend. GE Capital has recovered from the last recession and is showing great results. In fact, GE Capital's strong operating performance and capital position allowed management to return a $3 billion dividend. Also, GE´s industrial segments delivered another quarter of double-digit organic revenue growth. I think that management´s strategy to invest in growth markets is paying off, as GE achieved orders expansion in growth markets of 14% and revenue growth of 17%. I think it is very positive that the company ended the quarter with a record backlog. Also, margins have stabilized and GE' s energy, oil & gas, and transportation divisions performed very well with double-digit profit increases.

Management raised its operating cash expectations to $17-19 billion based upon the restart of the GE Capital dividend.

I think that valuation is not yet expensive. GE trades at 15.2x earnings compared with the 15.7x average for the peer group and 13.8x for the S&P 500. Over the last five years, General Electric s shares have traded in a range of 4.7x to 19.6x trailing 12-month earnings. I think that GE can go to $25 in the next two years.

Disney (NYSE:DIS)

I think that the strongest segment for Disney is its Studio Entertainment segment. This will be the driver for future earnings growth. Though revenues were flat year-over-year, operating income increased 19% to $313 million due to the strong performance of "The Avengers" and "Brave." "The Avengers" has grossed well over $1 billion in box office sales globally, making it the third-highest grossing film ever made. However, I think that securing the film's director, Joss Whedon, to a three-year deal was the most encouraging news. Whedon will write and direct "The Avengers 2," and he will work with Disney to create a live action series based on the group of superheroes. Whedon is a proven veteran who has developed many well-received TV programs ("Buffy the Vampire Slayer," "Angel," "Firefly") and can make films that satisfy both hardcore comic fans and casual fans. I think DIS will capitalize very well on this opportunity.

In the last earnings call, management gave encouraging commentary on ad trends (particularly ESPN) and showed reduced losses for the Interactive division. It is difficult to make a bearish case for a company that shows a free cash flow growth of +94% for the last period. I believe consensus estimates will increase so I am positive on DIS as a long-term investment.

Macy's (NYSE:M)

Macy´s reported strong same-stores sales and this metric is the most followed for retail companies. Macy's July same-store sales were +4.1% vs +2.5% and the company reported upside preliminary Q2 sales of $6.119 billion vs. $6.09 billion Capital IQ Consensus Estimate. Management was optimistic:

"We ended the first half of 2012 with strong sales in July. Despite some challenges from a sluggish macroeconomic environment and a temporary disruption of sales from the remodeling project at our Herald Square flagship store in New York City, the spring season met our expectations," said Terry J. Lundgren, chairman, president and chief executive officer of Macy's, Inc. "Going into the fall and approaching the holidays, we continue to focus on crisp execution of our core strategies¨

I think that M is a solid pick. Macy´s has been taking prudent steps to augment sales, profitability and cash flows. These include integration of operations, consolidation of divisions and customer-centric localization initiatives. To help drive traffic, Macy´s continues to focus on price optimization, inventory management and merchandise planning. These help the company to deliver better-than-expected second-quarter 2012 results, thereby prompting management to raise fiscal 2012 earnings guidance.

Express Scripts (NASDAQ:ESRX)

I think ESRX is one of the best companies in the pharmaceutical sector. Express Scripts performed very well in the second quarter of 2012, beating the consensus analyst estimates both in terms of revenue as well as earnings. Revenue jumped 143.7%, thanks to the expanded product portfolio following the acquisition of Medco Health Solutions. The strong performance caused management to increase its adjusted earnings guidance for 2012 to the range of $3.60 - $3.75 per share (previous guidance: $3.36 - $3.66 per share).

I think that the thesis to invest in ESRX is based on the fact that ESRX stands to benefit from increased generic utilization, shift toward mail orders, strong specialty growth and an aging population. Due to the economic slowdown, a large number of people are moving toward higher-margin generic drugs and adopting cost-saving initiatives like mail orders. The use of generic drugs should increase significantly over the next few years as several branded prescription drugs have lost or are scheduled to lose patent protection, including Pfizer´s Lipitor (November 2011). Increased generic uptake and higher use of mail orders should help the company improve its margins and profitability.

Other George Soros investment stocks

George Soros' s investment team also invested in Pepsico (NYSE:PEP) and Westport Innovations (NASDAQ:WPRT).

PEP has a strong track record of paying dividends and innovation. For 2011, its payout ratio to net income was 49% and its payout to operating cash flow was just 35%. Even deducting capital expenditures from the operating cash flow would allow for a payout ratio of 56%. Even without much growth in underlying fundamentals, PEP would be able to continue to grow its dividend for a long time. Furthermore, PEP has engaged in substantial stock buybacks over the past two years. Similar to Coca-Cola, PEP has an extremely strong track record of paying dividends and growing earnings. PEP pays a quarterly dividend and has raised its dividend every year since 1982. I like PEP for long-term oriented investors.

Regarding Wesport Innovations, I read a compelling report from Canaccord Genuity research. The report explained that industry momentum continues to accelerate (as evidenced by the recent Caterpillar announcements), while political actions remain a major potential catalyst. Canaccord continue to favor management' s strategy and how the business is performing. A Canaccord analyst has a target of $34 for the next 12 months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.