Tiger cub Andreas Halvorsen launched Viking Global at the end of 1999 with fellow former Tiger employees David Ott and Brian Olson. In its first year the fund returned 89% after fees. While that level of performance is not sustainable, Halvorsen has maintained a record of outperforming the market and his peers. For instance, in 2011, when the average hedge fund lost roughly 4%, Viking Global was up 7.80% (through December 23). Halvorsen has done this by sticking with a long/short global equity strategy combined with a bottom-up stock picking approach.
According to a 13F filed on February 14, Viking Global had 57 positions with a collective value of $9.59 billion at the end of the fourth quarter, up from 54 positions valued at $8.61 billion at the end of the third quarter. The largest of these was a 21.59 million share position in US Bancorp (USB) valued at $584.11 million. During the fourth quarter, Halvorsen sold a fair portion of Viking Global’s shares in the company – the fund had owned 24.46 million shares at the end of the third quarter – but the value of its position in US Bancorp actually increased from at the end of September, when it was valued at $575.68 million, to the end of December. Given the range of US Bancorp share prices (using adjusted close prices) in the third quarter ($22.98 to $25.81) and that of the fourth quarter ($25.47 to 27.05), it is likely that Halvorsen sold his shares at a premium.
US Bancorp was trading at $29.35 a share when the markets closed on February 17, with a mean one-year target estimate of $31.90. The company pays a 50 cents dividend (1.70% yield) and is priced low at 10.05 times its forward earnings. Analyst forecasts for the company are also optimistic. They estimate the company’s earnings will increase by an average of 10.50% a year for the next five years, versus expectations of 9.17% for its industry and 10.11% for its sector. Rival Bank of America (BAC) has roughly the same potential for upside – it closed trading on February 17 at $8.02 a share with a mean one-year target estimate of $9.00. It is also priced lower than US Bancorp at 7.36 times its future earnings and has an earnings growth estimate of 15.50% per annum for the next five years, but there is more to it than that. We think US Bancorp is the better deal. It has a higher dividend (Bank of America pays just 4 cents or 0.50% yield) and better prospects for growth.
There are great things in store for US Bancorp, which is also a favorite for Warren Buffett. The company is one of those banks that chose to grow largely through well-timed acquisitions. It works like this: The Federal Deposit Insurance Corporation (FDIC) insures a bank’s deposits and when a bank goes under the FDIC is named the receiver. It then sells the bankrupt bank’s assets to recoup the loss it sustains from having insured the assets in the first place. In other words, it is a great opportunity for a larger bank to acquire regional leaders at a massive discount.
US Bancorp has been using this strategy since the financial crisis to expand its domestic reach. The company acquired BankEast, a subsidiary of BankEast Corporation, in January. After an extensive due diligence, US Bancorp was able to buy the Tennessee-based company at a discount of roughy $67.5 million. Last year, US Bancorp acquired New Mexico-based First Community Bank. Before that, it was Bank of America (BAC)’s US and EU securitization trust administration, and BB&T (BBT)’s banking operations in Nevada. It may sound aggressive but it is really a matter of timing. US Bancorp is also getting into the ETF (exchange traded fund) game. According to filings dated February 17, the company is launching an ETF multiple series trust with $540 billion in assets – a new feature that could spell great things for US Bancorp going forward. We are definitely on-board with this stock.
Viking Global’s second largest position at the end of the fourth quarter was Invesco (IVZ). It had a 26.29 million share position worth $528.22 million at the end of December, down from 33.07 million shares at the end of the third quarter. While that is a strong decrease, the value of Viking Global’s position in Invesco actually went up during the fourth quarter; it had been valued at just $512.91 million at the end of September. The adjusted close price of Invesco ranged from $15.42 to $19.95 in the third quarter, increasing to $20.09 to $22.57 in the fourth quarter, so it looks like Halvorsen cashed in some of his shares during the fourth quarter while the price was high.
Invesco is a global investment management company and there are plenty of reasons to be optimistic about it. For one, there is the low interest rate environment set by the Federal Reserve. The Fed has said that they will not raise interest rates for the next couple of years, which spells opportunity for companies like Invesco. Next, there is the fact that retail investors are shifting back into equity products. With that sort of trend, Invesco, and companies like it are going to benefit, but those are general reasons. There is plenty of cause to be bullish on Invesco of its own right.
Invesco closed trading on February 17 at $24.70 a share on a mean one-year target estimate of $26.68. It pays a nice dividend at 49 cents (2.00% yield) and is priced low relative to its future earnings with a forward P/E of just 11.38. Analysts predict higher growth for the company, giving it an earnings growth estimate of 12.29% per annum for the next five years, beating expectations of 8.82% for its industry and 10.11% for its sector. The company reported fourth quarter EPS of 44 cents, beating analyst estimates of 40 cents a share. It was its third time in a row, which is pretty impressive given the financial markets.
Invesco seems like a good bet but its peers look even better. Blackrock (BK) has a lower forward PE of 9.7 and is expected to grow its EPS by 9.7% annually over the next five years. Another related stock, Morgan Stanley (MS), closed trading on February 17 at $19.16 a share with a mean one-year target estimate of $22.48. It pays a lower 20 cents dividend (1.00% yield) but it is priced even lower than Invesco and Blackrock with a forward P/E of 8.12, but analysts predict growth of just 9.00% per annum over the next five years for the company. All in all, Morgan Stanley and Blackrock are better bets than Invesco despite their slightly lower expected growth rates.