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Top 5 Hedge Fund Net Buys

May 21, 2014 | About:
Chris Mydlo

Chris Mydlo

30 followers

The recent top net buys of the hedge fund gurus were American Airlines (AAL), Actavis (ACT), Allegion (ALLE), Gilead Sciences (GILD), and Verizon (VZ). I found the net buys by using the S&P 500 Grid at GuruFocus. I adjusted the setting to include only hedge fund gurus and examined the results for both S&P 500 companies and non-S&P 500 companies.

American Airlines Group (AAL) 14 (16 buys, 2 sells)

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 hedge fund list for most net buys is American Airlines. The stock was also at the top of the list for all guru investors. There were 16 buys and two sells resulting in 14 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 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 (UAL)'s ratio of 7.43, making American Airlines undervalued by 14 percent. The stock would be priced at $44.87 if valued similarly to United Continental.

Actavis PLC (ACT) 14 (16 buys, 2 sells)

Market Cap: 36.23 billion, P/E: N/A

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

Actavis had 16 buys and two sells resulting in 14 net buys. New purchases were made by Daniel Loeb, John Paulson, and Joel Greenblatt. George Soros added to his position that he started in the previous quarter. Actavis is a global, integrated specialty pharmaceutical company focused on developing, manufacturing and distributing generic, brand and biosimilar products. The company has been growing through acquisitions with the purchase of Forest Laboratories (FRX) announced in February and last year’s purchase of Warner Chilcott. The deals were valued at $25 billion for Forest Labs and $5 billion for Warner Chilcott.

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The stock is fairly priced if everything goes according to the estimates stated in the press release of the merger between Actavis and Forest Labs. It is projected that the company will have more than $15 billion of revenue for 2015 and free cash flow generation greater than $4 billion. The company also projects double digit earnings growth in 2015 and 2016. Using the GuruFocus DCF Calculator with the free cash flow projections, the stock is fairly valued at $200.32. The company needs to maintain growth of at least 10 percent to maintain its value. The calculation also includes the dilutive effect of the merger. In addition to $26.04 in cash per share, shareholders of Forest Labs will also receive 0.3306 shares of Actavis for every share of FRX. Considering that the stock is fairly priced if the synergistic estimates are met, I am lowering the fair value by 10 percent. The stock is more accurately valued between $180 and $185 per share, making it slightly overvalued. It previously dropped to those levels in April before rebounding. Although it is a defensive generic drug company, executives tend to be overly optimistic on synergistic value created, and the stocks tend to languish for a couple years.

Allegion PLC (ALLE) 9 (12 buys, 3 sells)

Market Cap: 4.84 billion, P/E: N/A

Business Predictability: Not Rated, Financial Strength: 7/10, Profitability & Growth: 4/10

Allegion had 12 buys and three sells resulting in 9 net buys. The company was spun-off from Ingersoll-Rand (IR) in December 2013. The company specializes in security around the doorway and beyond: everything from residential and commercial locks, door closer and exit devices, steel doors and frames to access control and workforce productivity systems. According to the Allegion Equity Roadshow Presentation, the company expects over $2 billion dollars in revenue. There is a $25 billion market, and it is highly fragmented with significant growth potential.

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The company earned $0.37 per share in its first full quarter as a separate entity compared to $0.41 in the prior year. Allegion gave full-year 2014 guidance of $2.25 to $2.40 per share on an adjusted basis. The stock has a P/E of 21.7 using the full-year earnings guidance. The company has also been handicapped from the start with negative book value. The equity is now at $-60 million. Given that Allegion has experienced negative year-over-year earnings growth and has a negative book value, the stock should be trading with a lower P/E than the S&P 500’s P/E of 18. That would make the stock at least 20 percent overvalued. You can read Ross Givens’ article, “A Crash Course in Buying Spin-Offs,” for ideas of what to look for in spin-offs.

Gilead Sciences Inc. (GILD) 9 (14 buys, 5 sells)

Market Cap: 126.11 billion, P/E: 30.30

Business Predictability: 1/5, Financial Strength: 8/10, Profitability & Growth 8/10

Gilead had 14 buys and five sells resulting in nine net buys. The biopharmaceutical company discovers, develops, and commercializes medicines for the treatment of life threatening diseases in North America, South America, Europe, and Asia-Pacific. The stock has more than tripled in the past two years and is up 8 percent year-to-date. It took a momentary dip in March when U.S. lawmakers requested a briefing on the pricing of the company’s new Hepatitis C treatment, Sovaldi. The treatment costs $84,000 over a 12-week period, or $1000 a pill. Although the company was questioned about the high prices, no action was taken against Gilead.

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Sales of Sovaldi led to the company doubling its revenue for the first quarter of 2014. The drug was approved on an expedited basis by the FDA last year after being designated as a “breakthrough therapy.” It broke the record for sales of a drug in its first full quarter on the market. Its sales were $2.3 billion, making up 46 percent of the Gilead’s revenue for the quarter. So far about 30,000 people have used the treatment. About three to four million Americans may have hepatitis C, making the drug capable of delivering large revenues for years. Gilead also has a full pipeline of 35 product candidates in all phases of FDA approval.

The stock is currently carrying a P/E of 30, but the earnings only include one quarter of Sovaldi sales. If the company can maintain its first quarter earnings of $1.33 per share for the rest of the year, its P/E will be 15.30. Using the projected earnings and a growth rate of 15.4 percent, the stock is currently undervalued with a fair value of $111.76, making the stock a bargain compared to its current price of $81.34. To be conservative, for the growth input, I used the average revenue growth for the past 5 years. Other publications, such as S&P Capital IQ, are using a 38 percent long-term EPS growth rate.

Verizon Communications Inc. (VZ) 9 (14 buys, 5 sells)

Market Cap: 203.54 billion, P/E: 11.00

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

Verizon had 14 buys and 5 sells resulting in 9 net buys. Many big names traded the stock in the first quarter of 2014. The buyers include Daniel Loeb, Kyle Bass, and Joel Greenblatt. On the other side, David Tepper, the top earning hedge fund manager of 2013, sold his entire position of Verizon last quarter. Another hedge fund manager that sold out his total position is David Einhorn of Greenlight Capital.

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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.


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