Mariko Gordon founded Daruma Capital Management in 1995 after having managed portfolios for Valenzuela Capital Management and Royce & Associates. Daruma invests in a concentrated set of long-term stocks that follow a specified list of rules with a preference for smaller-cap stocks. Daruma’s rules include a potential upside of at least 50% over the next two years (and an upside three times the size of the downside) as well as to either sell or increase the position if a stock suffers a decline. We have looked through the fund’s 13F filings for the second quarter of 2012. Read on to see some of its top positions or see our full list of Daruma’s stock picks.
Despite selling some shares during the second quarter, Daruma’s top position in its 13F portfolio was Lumber Liquidators Holdings Inc (NYSE:LL). Lumber Liquidators sells hardwood flooring, and as such stands to benefit from a housing recovery in the U.S. Its stock is up 229% in the last year and its market capitalization is now $1.4 billion. With this rise in price, Lumber Liquidators has considerable growth priced into the stock: it trades at 41 times trailing earnings and 29 times analysts’ estimates for 2013’s earnings. The company did double its earnings last quarter compared to a year ago. Vinik Asset Management initiated a position in Lumber Liquidators between April and June.
Wright Express Corp (NYSE:WXS), a $2.7 billion market cap business payments company, held another high position in Daruma’s portfolio as the fund reported owning 1.1 million shares. Citadel Investment Group, managed by billionaire Ken Griffin, increased its own stake in Wright Express by 74% during the second quarter to a total of about 370,000 shares. Wright Express is another soaring stock: it has risen 80% in the last year, easily beating the S&P 500’s performance of 21%. It trades at 20 times earnings and 15 times forward estimates, so the Street expects that growth will closely match the stock price.
$2.4 billion market cap CoStar Group, Inc. (NASDAQ:CSGP) serves commercial real estate companies in North America and Europe. Daruma slightly increased its stake in CoStar and owned about 850,000 shares at the end of June. The stock is up 60% in the last year as commercial real estate shows potential to make a comeback, and revenue at the company was up 37% in the second quarter compared to the same period in 2011. Based on the fundamentals the stock looks expensive to us (forward P/E multiple of 36) so Daruma and other investors must be quite bullish on its growth to be invested at the current price.
Daruma owned 2.9 million shares of HEALTHSOUTH Corp. (NYSE:HLS) at the end of June. The company, which trades at a $2.4 billion market capitalization, operates rehabilitation hospitals for patients who have suffered conditions such as strokes or head injuries. HEALTHSOUTH more than doubled its earnings last quarter versus the same quarter last year, but the sell-side thinks this growth is short lived: the stock trades at 15 times forward earnings estimates, as opposed to 13 times trailing earnings. Like the stocks we’ve mentioned so far, HEALTHSOUTH is up significantly (49%) over the last year.
Life Time Fitness, Inc. (NYSE:LTM) rounded out the top five stocks in Daruma’s 13F portfolio. The fund increased its position by 6% during the second quarter and closed out June with a total of 1.3 million shares in the $2 billion market cap provider of athletic centers, athletic programs, and nutritional products. The company is an attractive growth play: despite its appealing industry and 21% earnings growth in the second quarter over last year, it trades at 20 times earnings- a reasonable multiple given Life Time Fitness’s other characteristics. On a forward basis, the P/E is 15; the five-year PEG ratio is 1.1. We think the stock is worth a closer look.