Bain Capital’s Hedge Fund Likes Dollar General and More

Bain Capital is best known as a private equity fund engaging in leveraged buyouts, but its success has allowed it to develop other investment funds including long/short equities fund Brookside Capital. Brookside filed its quarterly 13F in the middle of February; we like to analyze 13Fs both in pursuit of investment strategies (for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and to see which stocks individual hedge funds like. Read on for our quick take on the five largest holdings by market value in Brookside’s portfolio as of the end of December or see the full list of stocks the fund reported owning.

Brookside’s largest position was its 4.9 million shares of Express Scripts Holding Company (NASDAQ:ESRX), representing a large increase in shares from three months earlier. 73 other funds and other investors in our database of 13F filings owned Express Scripts, making the pharmacy benefit services company one of the most popular healthcare stocks among hedge funds (find more healthcare stocks hedge funds love). Express Scripts trades at 12 times forward earnings estimates, as it is expected to continue to recover from its conflict with Walgreen Company (NYSE:WAG); current growth rates are temporarily very high as a result of that factor.

Earnings Analysis: Dollar General Corp. (NYSE:DG)Dollar General Corp. (NYSE:DG) was another of Brookside’s top picks, as the fund’s stake increased by 225 to a total of 5.3 million shares. The dollar store’s beta is only 0.1, signifying even less sensitivity to the broader economy than discount retailer such as Wal-Mart Stores, Inc. (NYSE:WMT). Dollar General’s trailing earnings multiple is 17, which is not that wide a premium over Walmart’s trailing P/E of 14, and revenue and earnings growth have been quite good at the dollar store. Billionaire Stephen Mandel’s Lone Pine Capital was also buying Dollar General last quarter (check out Mandel's stock picks).

Here are three more stocks Brookside owned:

The fund initiated a position of about 600,000 shares in AutoZone, Inc. (NYSE:AZO) between October and December. Autozone, interestingly, is another stock whose price tends to be unrelated to changes in the broader market as the beta here is 0.2. At a market capitalization of $14 billion, the auto parts store is valued at 16 times its trailing earnings. We’d note that revenue and earnings were actually down last fiscal quarter compared to the same period in the previous fiscal year. Viking Global, managed by billionaire Andreas Halvorsen, was also buying Autozone in the fourth quarter of 2012 (find Halvorsen's favorite stocks).

The 13F also disclosed a new Brookside position in Sensata Technologies Holding N.V. (NYSE:ST), a $5.8 billion market cap manufacturer of technical sensors and controls. Tiger Cub John Griffin’s Blue Ridge Capital is another major holder of the stock. In the fourth quarter of 2012, net income was up strongly, though a small decline in sales indicates that Sensata may have trouble sustaining its earnings growth. In addition, the trailing earnings multiple of 33 suggests that considerable improvements are already accounted for in the current price. We think that we would avoid Sensata for now.

EMC Corporation (NYSE:EMC) rounded out Brookside’s top five stock picks. The $49 billion market cap data storage company is down 18% in the last year, though last quarter it experienced modest growth in revenue and earnings compared to the fourth quarter of 2011. EMC carries trailing and forward P/E multiples of 19 and 11, respectively, so while it looks a bit pricy in terms of its current performance the sell-side appears to think that earnings will grow rapidly over the next two years. EMC joined Apple Inc. (NASDAQ:AAPL) and more on our list of the most popular tech stocks among hedge funds for the fourth quarter of 2012 (see our top ten list).

Disclosure: I own no shares of any stocks mentioned in this article.

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