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Top 5 Net Buys Of The Investing Gurus

May 19, 2014 | About:
Chris Mydlo

Chris Mydlo

41 followers

The top net buys of the investing gurus in Q1 of 2014 were American Airlines (AAL), National Oilwell Varco (NOV), Gaming and Leisure Properties (GLPI), Symantec (SYMC), and Verizon (VZ). I found the net buys by using the S&P 500 Grid at GuruFocus. I adjusted the settings to include all investors and examined the results for both S&P 500 companies and non-S&P 500 companies.

American Airlines Group Inc (AAL)

Market Cap: 27.77 billion, P/E: 10.30

Business Predictability: 1/5, Financial Strength: 6/10, Profitability & Growth: 6/10

At the top of the list for most net buys is American Airlines. There were 19 buys and 3 sells resulting in 16 net buys. It is possible that some of the buys are including distributions to the investors that held the bankrupt American Airlines stock that stopped trading in December of 2013. This is a case where a bankrupt stock happened to be very profitable. Shareholders of the old AAMRQ stock are up over 150 percent from the day the shares were cancelled in early December. The current American Airlines is a merged company with US Airways. The new stock is up 52 percent year-to-date.

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During bankruptcy, the airline was able to negotiate union contracts and restructure its balance sheet. The new, more efficient company only has one quarter in the books generating earnings of $0.65. Based on analyst estimates, the stock has a forward P/E of 6.38. The next lowest forward P/E of its main competitors is United Continental’s (UAL) ratio of 7.43, making American Airlines undervalued by 14 percent. The stock would be priced at $44.87 is valued similarly to United Continental.

National Oilwell Varco Inc (NOV)

Market Cap: 35.31 billion, P/E: 14.60

Business Predictability: 2.5/5, Financial Strength: 7/10, Profitability & Growth: 7/10

NOV had 24 buys and 9 sells resulting in 15 net buys. New investors could be attracted to the spinoff of the distribution business scheduled to take place May 30. The new company will operate under the name, NOW Inc. with the symbol DNOW. Shareholders will receive one share of DNOW for every four shares of NOV. Spinoffs are usually processed to unlock value in the companies with the idea that the companies will operate more efficiently as separate entities. NOV states their reason for the spinoff as:

“The Board of Directors and management of NOV believe the separation and the distribution will allow each company to pursue a more focused, industry-specific strategy; enable the management of each company to concentrate resources wholly on its particular market segments, customers and core businesses, with greater ability to anticipate and respond to changing markets and opportunities; allow each company to recruit and retain employees with expertise directly applicable to its needs; provide NOW Inc. with a valuable acquisition currency; eliminate competition for capital between NOW Inc.’s business and NOV’s other businesses and allow more direct and efficient access to capital; and provide investors in each company with a more targeted investment opportunity”

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NOV has been a solid for at least the past 10 years growing revenue at an annual rate of 15.3 percent and earnings at an annual rate of 24.80 percent. The stock is undervalued in relation to its Peter Lynch Earnings Line by 4.8 percent. The stock is up 4 percent year-to-date. Perhaps more value can be unlocked with the spinoff. More information on spinoffs can be found in Ross Givens’ article “A Crash Course In Buying Spin-Offs.” There also a “List of Spinoff Stocks” available at GuruFocus.

Gaming and Leisure Properties, Inc. (GLPI)

Market Cap: 3.91 billion, P/E: 72.10

Business Predictability: Not Rated, Financial Strength: 5/10, Profitability & Growth: 4/10

GLPI had 15 buys and 1 sell resulting in 14 net buys. The company is a real estate investment trust that was recently spun-off from Penn National Gaming (PENN) and has been operating as a separate entity as of November 1, 2013. GLPI is now the owner of the properties, and PENN is leasing them. GLPI’s primary business consists of acquiring, financing, and owning real estate property to be leased to gaming operators, to which the tenet is responsible for all facility maintenance as well as other expenses. It is the first gaming focused REIT and now owns 22 properties. The company can now purchase gaming real estate and lease them to casino operators other then PENN. GLPI is also interested in acquiring leisure properties outside of gaming.

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It is difficult to value the company with only one full quarter of operating history independent of Penn National Gaming. The company had a net income of $0.38 per share in the first quarter of 2014. Analysts are estimating a forward P/E of 12.82 based on 2015 estimated earnings. It is in line with EPR Properties (EPR) forward P/E of 12.22. A majority of EPR’s portfolio consists of entertainment related properties making it a company that can be used for comparisons. The dividend yield for GLPI is 6.00 percent compared with 6.30 percent for EPR. As of now, the stock is fairly valued as compared with EPR based on forward estimates. The stock is down 11.6 percent year-to-date adjusting for the special dividend of $11.84 in January.

Symantec Corporation (SYMC)

Market Cap: 15.49 billion, P/E: 18.20

Business Predictability: 1/5, Financial Strength: 7/10, Profitability & Growth: 7/10

Symantec had 22 buys and 8 sells resulting in 14 net buys. It is viewed as a company in transition, especially with having an interim CEO after the previous CEO was terminated in March. The company has been largely known for its Norton Anti-Virus software. While ant-virus software can be used as a first line of defense, it only catches less than half of the cyber threats. Anti-virus software has become a low-growth business. The company is now allocating resources to growth areas such as cloud, mobile, and appliances. The 2013 annual report states the goals of delivering better than 5 percent organic revenue growth and greater than 30 percent operating margins in 2-3 years. The latest quarterly report shows operating margins of 18.83 percent. It will be a large feat to accomplish 30 percent operating margins. Symantec also has a long-term goal of return at least 50 percent of free cash flow to shareholders through a combination of dividends and share buybacks. The company started paying a dividend in 2013 and has been buying back shares every year since 2007.

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It is interesting to note that Joel Greenblatt has been a buyer of the stock since he has a known formula to buy stocks with high return on capital (ROC) and earnings yield. The ROC is 100.09 percent, and the earnings yield is at 8.4 percent by using the formula of operating income / enterprise value. The stock is down 17 percent from its 52-week high $27.10 in August has stabilized and slightly rebounded since the termination of the CEO in March. Without a permanent CEO in place it is likely that the stock’s upside is limited. It is currently trading at a P/E of 18.30, just slightly higher than its 3-year median P/E of 17.4. Until the company can provide stability at the CEO level, the stock warrants the lower P/E of 17.4, making it just slightly overvalued. The previous CEO was only on the job to less than two years.

Verizon (VZ)

Market Cap: 203.54 billion, P/E: 11.00

Business Predictability: 3.5/5, Financial Strength: 7/10, Profitability & Growth: 8/10

Verizon had 29 buys and 16 sells resulting in 13 net buys. Many big names traded the stock in the first quarter of 2014. The purchase making the most headlines was from Warren Buffet’s Berkshire Hathaway. The opening position was for over 11 million shares valued at about $541 million as of today’s close. On the other side, David Tepper, the top earning hedge fund manager of 2013, sold his entire position of Verizon last quarter. His fund held just over 400 thousand shares.

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In February, Verizon completed its acquisition of Vodafone Group Plc’s (VOD) 45 percent indirect interest in Verizon Wireless in a transaction valued at $130 billion. The deal increased shares outstanding by 19 percent. The stock is flat year-to-date and can advance now that the dilution is over. Verizon is trading at a P/E of 11, close to AT&T’s (T) P/E of 10.5. A higher P/E is warranted for Verizon since it has a higher business predictability rank of 3.5 compared to AT&T’s score of 1. Verizon also scores higher for financial strength. The stock is undervalued trading at over a 35 percent discount to the median industry P/E of 17.10.


Rating: 4.5/5 (2 votes)

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