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Bargain Hunting with Julian Robertson

By Michael Carr   |   Tuesday, 21 Oct 2008 05:08 PM

Julian Robertson has accumulated over the last two decades of the 20th century, one of the greatest value investing records, handily beating the S&P 500 and edging out Warren Buffett's Berkshire Hathaway.

Starting with $8 million in 1980, he built a $22 billion hedge fund by the late 1990s.

However, sticking to his value investing philosophy during the Internet bubble led to disastrous returns. This led Robertson to close his funds in early 2000 and return money to his shareholders just as the bear market took hold.

From 1980 until he stopped managing money in 2000, Robertson's Tiger Management averaged 31.5 percent annual returns before fees. This performance more than doubled the return of the S&P 500, which was only 14.6 percent over that time frame.

Robertson also narrowly outperformed Buffett, who "only" achieved a 30.2 percent return over those two decades.

With a personal wealth of $1.8 billion, Robertson is ranked as the 262nd richest American by Forbes. Still an active investor, he recently told CNBC he is buying "some Apple, some Microsoft, Baidu — a Chinese Google — MasterCard, Visa," and has a "pretty good bet in copper right now."

I used his shopping list to develop this week's stock screen:

• Technology stocks are at the top of his list, so I restricted the screen to this sector.

• His picks are all very large cap stocks, so only stocks in the top 5 percent of market capitalization were considered.

• He favors stocks with a high return on equity and high gross margins. The screen eliminated stocks with ratios below 20 percent on these valuation metrics.

• The current ratio, a measure of a company's ability to pay its bills, should be at least 1.4, indicating it should have enough cash on hand to meet all expenses for at least four months. This criterion eliminates companies that might have trouble raising cash in a credit crunch.

• Earnings should be positive for the most recent 12 months with positive earnings projected for next year.

Fourteen stocks meet the criteria that Robertson appears to use for his tech picks:

ABB (ABB) is a Swiss company that provides power and automation technologies to utilities and industrial customers. At the recent price of 15.85, this is a typical value pick with a P/E ratio of 8 and a market-beating dividend yield of 3.1 percent.

Activision Blizzard (ATVI) makes video games, including such blockbuster titles as Guitar Hero, Call of Duty, and Tony Hawk. Analysts expect earnings to grow by more than 22 percent a year for the next five years, and 15 of 17 analysts covering ATVI have raised their estimate for this year over the past 30 days. Recent price: 13.50.

Adobe Systems (ADBE), the maker of the ubiquitous Acrobat reader and a host of graphics software packages, is facing an uncertain future since most of its sales are to cash-strapped corporate IT departments. The stock recently traded at 28.65, giving it a forward P/E ratio of 14 based on the recently lowered earnings estimates.

Apple (AAPL) was recently priced at 97.61, less than half its 52-week high. Although earnings growth is likely to slow to only 22 percent over the next five years, the company could not sustain its triple digit growth rate of the past five years. The P/E ratio of 19 reflects this slowdown.

Baidu.com (BIDU) was trading at 250 recently, and the most optimistic analysts expect the stock to double. Robertson is the sixth largest shareholders.

Cisco Systems (CSCO) was one of the great growth stocks in the 1990s, gaining nearly 55,000 percent at its 1999 peak. It is now a value play, priced at 10 times next year's earnings at the recent price of 18.83.

Corning (GLW) makes flat-panel displays and fiber-optic cable. Fidelity and Janus mutual funds own nearly 10 percent of GLW, which had a P/E ratio of 3 at the recent price of 11.95. Despite recent analyst downgrades of the stock, it is still trading at 7 times next year's forecasted earnings.

First Solar (FSLR) designs and manufactures solar modules to convert sunlight into electricity. It has long-term contracts with 12 European project developers and system integrators. FSLR is the largest company in its field and has almost no debt. The recent price of 144.23 provides valuation levels that are nearly half of historical averages for this company.

Google (GOOG) is a stock Robertson recently bought. GOOG has revenue of $21 billion a year and a 25 percent profit margin. With nearly $15 billion in cash, GOOG is likely to continue researching new ways to increase sales and earnings. Recent price: 379.32.

Infosys Technologies (INFY) is an IT consultant based in India. It has recently slashed earnings forecasts because of an expected slowdown in Indian outsourcing. At a recent price of 27.19, the bad news may be priced into INFY, which has a forward P/E ratio under 12.

Microsoft (MSFT) is the classic growth story. Now, at a recent price of 24.72, the stock trades at a P/E ratio of 13 and a dividend yield of 2.1 percent. MSFT has more than $21 billion in cash on its books that it can use to revive earnings growth or buy back its own shares.

Oracle (ORCL) is a leading database software provider. Another former tech high-flyer, ORCL gained nearly 5,000 percent in the 1990s. It has now settled into low double-digit earnings growth, and has almost as much cash ($13 billion) on hand as Google does. Recent price: 18.16.

QUALCOMM (QCOM) has a proven technology that is used in almost all cell phones. It also continues to win patent-infringement cases, most recently being awarded $2.5 billion from Nokia. QCOM recently traded at 40.29, giving it a dividend yield of 1.6 percent.

Texas Instruments (TXN) invented the semiconductor and still sells more than $12 billion worth every year. TXN has grown its dividend by an average of 27 percent a year for the past five years, and currently pays a 2.3 percent dividend. Recently trading at 17.98.

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MichaelCarr
Julian Robertson has accumulated over the last two decades of the 20thcentury, one of the greatest value investing records, handily beating the S&P 500 and edging out Warren Buffett's Berkshire Hathaway.Starting with $8 million in 1980, he built a $22 billion hedge fund by...
julian,robertson
1004
2008-08-21
 

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