Now that the second quarter portfolios have been filed with the SEC, I used the GuruFocus S&P 500 Grid to get a look at what the hedge fund gurus have been buying. I prefer to use “net buys” over “buys” because it also factors in what the hedge fund gurus have been selling. When using the S&P 500 Grid, I adjusted the settings to only include the hedge fund gurus and examined the results for both S&P 500 and non-S&P 500 companies. The top results were MasterCard (MA), eBay (EBAY), Occidental Petroleum (OXY), Ally Financial (ALLY), Actavis (ACT), and Allergan (AGN).
- Warning! GuruFocus has detected 3 Warning Signs with MA. Click here to check it out.
- MA 15-Year Financial Data
- The intrinsic value of MA
- Peter Lynch Chart of MA
MasterCard Inc (MA)
Market Cap: 87.81 billion, P/E: 27.40
Business Predictability: 1/5, Financial Strength: 9/10, Profitability & Growth: 8/10
At the top of the hedge fund list for net buys is MasterCard. There were 10 buys and 2 sells resulting in 8 net buys. The list of purchasers includes Steve Mandel, Jim Chanos and Jim Simons, although one of the sellers was George Soros.
MasterCard is the well-known credit card company. In its 10-k, it describes itself as a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments and businesses worldwide, enabling them to use electronic forms of payment instead of cash and checks.
The macro view of the growth in electronic transactions and MasterCard’s high return on equity (ROE) support the rationale for buying the stock. ROE has averaged a high 38.25 percent over the past five years. Although the long-term prospects look good, the stock has climbed 269 percent over the past five years and has gotten ahead of itself and could lead to subpar performance over the next year. The stock has a high P/E of 27.7. According to the GuruFocus DCF Calculator, earnings will need to grow at a rate of 19.54 percent to justify its current price using a discount rate of 12 percent. The annualized 5-year growth rate in EPS has been 23.10 percent, but earnings growth has slowed to 14.5 percent over the past 12 months.
eBay Inc (EBAY)
Market Cap: 67.7 billion, P/E: N/A
Business Predictability: 4/5, Financial Strength: 8/10, Profitability & Growth: 8/10
eBay had 12 buys and 5 sells resulting in 7 net buys. When considering all of the gurus we follow, not just the hedge funds, eBay had the most net buys. The hedge fund buyers include Carl Icahn, Jim Chanos, Seth Klarman and Leon Cooperman.
eBay is the online auction website that enables global commerce and payments on behalf of users, merchants, retailers and brands of all sizes. Its three reportable segments are Marketplaces, Payments and Enterprise. The Payments segment includes PayPal. The Enterprise segment includes eBay’s acquisition of GSI Commerce in June of 2011, which provides commerce technologies, omnichannel operations and marketing solutions for large, nationally recognized retailers and brands. The activist investor, Carl Icahn (Trades, Portfolio), was pushing for a spinoff of the PayPal division earlier in the year, but pulled back on his demands after speaking with the CEO. The idea of a spinoff came to the forefront again in late August. A spokeswoman for eBay said that the board will continue to assess all alternatives to create long-term value and enhance growth and competitive positions of both eBay and PayPal.
The company’s negative earnings report in the first quarter was due to a $3 billion tax charge from bringing offshore money back to the United States. Bringing the cash back to the U.S. increased its available cash by $6 billion. Adding the tax charge back to earnings results in a P/E ratio of 25. According to its historical P/S ratio, the stock is now fairly valued and is trading right at its 5-year median P/S ratio of 4.2. The opportunity is in the possible spinoff of PayPal that could unlock value.
Occidental Petroleum Corp (OXY)
Market Cap: 80.11 billion, P/E: 13.70
Business Predictability: 2.5/5, Financial Strength: 5/10, Profitability & Growth: 9/10
Occidental engages in the acquisition, exploration and development of oil and gas properties in the United States and internationally. Its three segments are Oil and Gas, Midstream and Marketing, and Chemicals.
The stock is undervalued by about 10 percent according to its Peter Lynch Earnings Line value of $113.80. Revenue and earnings per share have been growing at annual rates of 14.5 and 13.9 percent over the past five years. The company has a low debt-to-equity ratio of 0.16 and is expected to spin off its California assets within the next year.
Ally Financial Inc (ALLY)
Market Cap: 11.89 billion, P/E: N/A
Business Predictability: Not Rated, Financial Strength: 5/10, Profitability & Growth: 5/10
Ally Financial is one of the largest providers of automotive financing products, including wholesale loans and retail loans and leases, a leader in direct banking, and the 19th-largest bank holding company in the United States based on total assets.
Before rebranding itself as Ally Financial, the old GMAC fell into trouble with its subprime mortgages. During its restructuring, the bank was able to shed its mortgage division and has come out with a stronger balance sheet. The stock is trading at a P/B ratio of 0.9 and could still be carrying the stigma of the old GMAC that went through financial troubles. Banks tend to trade in a P/B range of 1.2 to 1.3 in normal times. Ally Financial could revert to those levels making the stock undervalued by over 30 percent. A P/B ratio of 1.2 would value the stock at about $33 per share.
Actavis Plc (ACT)
Market Cap: 60.4 billion, P/E: 488.70
Business Predictability: 1/5, Financial Strength: 5/10, Profitability & Growth: 8/10
Actavis is a leading integrated global specialty pharmaceutical company engaged in the development, manufacturing, marketing, sale and distribution of generic, branded generic, brand, biosimilar and over-the-counter pharmaceutical products.
Actavis bought Forest Labs for about $25 billion earlier in the year, and the company is continuing to grow through acquisitions. The current P/E ratio is listed as a sky-high $488.70, but the forward guidance given by Actavis includes an expected EPS between $15.60 and $16.80 for 2015. Using the midpoint of the range leads to a forward P/E ratio of 14.2. Analysts are estimating a 5-year expected PEG ratio of 0.87. If analysts’ estimates are correct, the stock is undervalued with a growth rate that is higher than its P/E ratio.
Allergan Inc (AGN)
Market Cap: 49.07 billion, P/E: 38.80
Business Predictability: 3/5, Financial Strength: 9/10, Profitability & Growth: 9/10
Allergan discovers, develops and commercializes a diverse range of products for the ophthalmic, neurological, medical aesthetics, medical dermatology, breast aesthetics, urological and other special markets in more than 100 countries around the world. A majority of the company’s revenue comes from eye care pharmaceuticals and Botox.
The value of the stock lies within the activist position that Bill Ackman (Trades, Portfolio) has taken. His hedge fund, Pershing Square, now owns 9.71 percent of the company and has made Allergen its largest equity holding. He has been working with Valeant Pharmaceuticals (VRX) to help the company buyout Allergan. A bid from Valeant to purchase Allergan was valued at $181 per share earlier in the year. Ackman is not backing down and is still focused on getting a transaction completed to maximize the value of his investment.
The S&P 500 Grid is an excellent tool that can help gain insights into the activities of the top investing gurus. The grid can be customized to display results based on different lists of gurus, whether they are buying or selling, by market cap, and can even be narrowed down to specific sectors. The grid can also be customized to display the picks of your own personalized list of gurus. It is quick and easy to use and gives instant results. Give it a try through the following link: S&P 500 Grid.
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