Finding hedge fund winners this year is a daunting task. Ironically, in a market environment like the one we are in, losing only a little bit can actually be thought of as a win.
Viking Global hedge funds showed very small losses (less than 4 percent) through October and were invested mainly in stocks. Over the first 10 months of 2008, the S&P 500 lost about 35 percent.
The fund group is run by Andreas Halvorsen, one of the so-called "Tiger Cub" fund managers who worked under billionaire hedge fund manager Julian Robertson of Tiger Management. When Robertson left the industry in 2000, many of his team members started their own funds.
In his first year on his own, Halvorsen delivered an 89 percent return, while the S&P lost over 9 percent in 2000. Performance data since that time is hard to find for Halvorson, who is known as being a secretive stock picker.
However, we do know he earned $520 million in 2007, making him the tenth-highest paid in the industry. Since hedge fund manager compensation is based upon performance, this means Halvorsen enjoyed considerable success last year.
From a list of his recent buys, I analyzed the common factors that drive Halvorsen's stock selection. He is definitely a value investor, and like fellow hedge fund giant Paul Tudor Jones, Halvorsen seems to be looking to buy growth at a reasonable price.
The criteria for this week's screen are: Return on equity must be greater than the industry average. This is Warren Buffett's favorite measure of a company's management, and most of Halvorsen's recent buys were among the leaders in this category. Low debt compared to their industry. A P/E ratio greater than the industry average, which usually means that the market thinks of the company as an industry leader. A PEG ratio less than the industry average. The PEG ratio divides the P/E ratio by the growth rate of the earnings per share. Low values indicate that the market is likely underestimating growth and the stock is undervalued. This indicator combines growth and value and is widely believed to be the best indicator to discover growth at a reasonable price. Only the largest 10 percent of stocks were considered since large funds can't easily trade smaller stocks. Positive earning over the past year and a positive earnings estimate for next year. Because of economic uncertainty, energy stocks, utilities, and financials were excluded.
Nine stocks, from a database of more than 8,800 stocks, made the list:
Apple (AAPL) has more than $24.4 billion in cash, an astounding $27.55 per share. This is more cash than Microsoft or Google has, and gives AAPL the ability to expand through acquisitions or develop new products internally. At a recent price of 90, AAPl is priced at only 14 times next year's estimated earnings. Analysts expect the company to see earnings growth of more than 20 percent a year for the next five years, almost twice the industry average.
Coach (COH) was a new buy for Halvorsen in the third quarter of 2008. He bought the luxury goods maker at the same time company insiders were adding to their holdings, which is usually a bullish sign for any company. COH has grown sales an average of 27 percent a year over the past five years, compared to an industry average of 6 percent. At a recent price of 21, COH trades at 10 times earnings.
Dollar Tree (DLTR) operates almost 3,500 stores that sell everything for a dollar, a simple concept that is popular with cash-strapped consumers. DLTR recently closed at 43.71, near its 52-week high in price. Investors are confident that consumers will continue shopping at these stores at least until the economy recovers.
Emerson Electric (EMR) is a diversified global technology company that has increased its dividends for 51 consecutive years. The stock was recently trading at 34.02, giving investors a yield of 3.9 percent. With production facilities located in China, Southeast Asia, Eastern Europe, and Mexico, EMR will be able to shift production to the lowest cost region, taking advantage of volatile moves in the dollar as they occur.
GameStop (GME), the industry-leading retailer of video games, has a unique business model. They sell new video games, buy them back from consumers after a few months for less than a quarter of the retail price, and then sell them as used. GME is the largest player in the used video game sales category. Used games have an average price of $16, compared to an average new price of $42. Like DLTR, GME should prosper in a slumping, or recovering, economy. Recent price: 24.60.
Google (GOOG) is now reasonably priced by some valuation measures after the dramatic market declines. At a recent price of 210.17, GOOG is more than 50 percent below its all-time high prices and trades at a P/E ratio of 14 based on next year's estimated earnings. The company is debt-free and growing earnings at about 20 percent a year.
Hansen Natural Corporation (HANS) makes natural sodas and Monster-brand energy drinks and has delivered incredible gains to investors in the past. From an average, split-adjusted price of 0.50 in 2002, HANS traded as high as 68.40 in November 2007. SmartMoney magazine reported that it was the best performing stock of the decade following 1996. Recently priced at 32.93, HANS now has a value-priced P/E ratio 18.
Priceline.com (PCLN) consistently beats analyst earnings expectations, having done so for 10 straight quarters. In the most recent quarter, revenue grew by 35 percent and operating earnings per share were up 51 percent over last year. Travel bookings for PCLN grew about seven times faster than the growth seen at competitors. In a slowing economy, consumers seem to like the company's name-your-own-price service. Recent closed at 69.25.
Urban Outfitters (URBN) recently fell by 20 percent in one day after the apparel retailer reported flat same-store sale for November and warned that sales would be lower than last year throughout the holiday season. The formerly high-flying stock now trades at a P/E ratio of 12 based on the recent close of 15.13, well below its five year average P/E ratio of 28. Over the long-term, earnings growth is expected to average 21 percent a year, in line with the historical average of 23 percent a year.
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