Apple Inc (NASDAQ:AAPL), Qualcomm, Cognizant Technology Solutions (NASDAQ:CTSH), and Avago Technologies (NASDAQ:AVGO) are in Lee Ainslie’s ‘fab four’. As mentioned in Lee Ainslie’s biography on Insider Monkey, the manager of Maverick Capital has “beaten the S&P 500 index on average by about 6-7 percentage points annually but with 50% less volatility,” implying he has been able to generate an alpha in the neighborhood of 10% each year. The primary piece of Ainslie’s investment strategy is to focus his efforts on long/short equity trading, while staying away from every other asset class.
Interestingly, nearly half of the hedge fund manager’s portfolio is composed of technology stocks, and with a 13F portfolio of nearly $7 billion, that’s a lot of dough. Without further ado, here are Mr. Ainslie’s top four stock picks; it is definitely worth it to consider adding them in your own portfolio.
As one of the world’s largest developers of wireless technology for mobile phones, Qualcomm is truly a tech behemoth. Lee Ainslie certainly thinks so, as he currently holds over $350 million worth of the stock, equal to 5.2% of his total portfolio holdings.
The company generated close to $15 billion in sales last year, while sporting impressive operating (31.0%) and net (32.1%) margins. Since the recession, the company has grown its bottom line by an average annual rate of 12.4%, and this growth is expected to continue, as 5-year average EPS estimates are in the 14-15% range.
Now, the company actually disappointed in its most recent earnings release, missing the Street’s estimate by 1.2%, but analysts are still expecting Qualcomm to finish 2012 with an EPS of $3.18 a share, up 5.7% from the $3.01 it reported in 2011. Due to the fact that the stock trades at a Price-to-Earnings ratio (20.9X) below its own 5-year historical average (24.2X), there is moderate upside if the company is able to hit year-end estimates. Qualcomm is also an indirect way of betting on Apple Inc (NASDAQ:AAPL).
Cognizant Technology Solutions (NASDAQ:CTSH)
Taking the second spot in Ainslie’s portfolio, Cognizant Technology Solutions has been quite the bull over the past three months, generating a return of 15.1% over this time period. The IT services company has seen impressive EPS growth over the past year (19.9%), and this expansion is expected to continue at an almost identical rate over the next half-decade.
Cognizant Technology did report rather impressive earnings last quarter, reaching a bottom line of $0.82 a share, up 22.4% from the $0.67 it reported in Q2 of 2011. On the whole, analysts are expecting the company to finish 2012 with earnings of $3.38 a share, an 18.8% growth from last year’s total. If Cognizant Technology can hit this mark, or at least come close to low-range estimates ($3.36), fairly valued shares of the IT company can eclipse $80. At their current price in the $66 range, Cognizant Technology’s shares are trading at a P/E ratio (21.4X) below their 5-year average (24.2X).
Avago Technologies (NASDAQ:AVGO)
Comprising nearly $320 million worth of Ainslie’s portfolio, Avago Technologies is a mid-sized semiconductor company that has returned more than 20% in 2012 thus far. Compared to industry norms (17.7X), Avago trades at a rather cheap P/E ratio of 15.7X. When growth is factored into the equation, we can see that the company’s stock currently sports a PEG ratio of 0.8; typically any figure below 1.0 signals an attractive valuation.
Now, the company has grown its operating (384%) and free cash (477%) flows by impressive rates post-recession, but it still trades at a Price-to-Cash flow ratio (13.0X) that is below its own 3-year historical average (17.5). In fact, Avago’s cash flow has traditionally traded at a 95% premium over the S&P 500’s average in the past three years. This year, they are much cheaper, trading at a 43% premium.
The Street is expected the company to finish 2012 with earnings of $2.53 a share, which would actually be a 2.7% declination from 2011 totals. Nonetheless, if the company is able to hit this target, fairly valued shares can surpass the $40 mark. They currently trade near $35 a share. With stronger year-over-year growth forecasted for 2013 (8.3%), we could witness a moderate price upswing by next Christmastime.
Apple, Inc. (NASDAQ:AAPL)
Last but certainly not least, Apple’s accolades are endless, though we’d like to point out the company’s potential in China in case you were unaware. Ainslie currently holds 540K shares of the company, good for a portfolio value of more than $315 million. At its market price in the $660 range, the company is trading at a discount in nearly every category, most notably on the earnings front.
Although the company did miss its Q3 estimates by a slight amount, Apple Inc (NASDAQ:AAPL) is still on track to finish 2012 with earnings of $43.92 a share. Consider these statistics: an EPS in this range would mark a 58.9% growth from 2011 totals, and a whopping 383.7% expansion from 2009 totals. Any way you slice the numbers, the tech giant’s bottom line growth is otherworldly.
Consequently, it is perplexing to see that Apple’s stock is currently trading at a P/E ratio of 15.6X, nearly 30% off its 5-year historical average (21.9X), and below the likes of Google Inc (NASDAQ:GOOG) at 20.7X. Moreover, Apple also sports an astoundingly low PEG ratio of 0.69. Google’s is a more moderate 1.06.
If Apple Inc (NASDAQ:AAPL) is able to reach its year-end targets – which it most likely will (see: iPhone 5 release) – fairly valued shares can get to $1,000 by the end of next year. As this article so appropriately concludes, the company’s “widely anticipated iPhone 5 release, and an eventual deal with China mobile have the ability to vault Apple” into the quadruple digits.