Google Inc (NASDAQ:GOOG) has an issue with revenue diversification, and was a selloff for Chilton last quarter. The search giant is heavily reliant on search revenues. Google previously launched its very own mobile phone – the Nexus One – but soon after stopped selling it directly. Google does have promising opportunities, including YouTube and the digital wallet, but these remain a small part of the company’s top line.
Another headwind facing Google is the migration to mobile search. Although this is a fundamental shift that Google will not be able to ignore, it is cannibalistic to its PC-focused search business. With a P/E that is well above other tech peers at 22x, compared to Apple (11x) and Microsoft (14x), it could be Chilton sees better value and growth opportunities in Google’s competitors. Billionaire Ken Fisher – founder of Fisher Asset Management and Forbes columnist – is still one of Google’s top supporters (check out Fisher’s other picks).
Starbucks Corporation (NASDAQ:SBUX) has been performing well of late, with top line growth last quarter and margin expansion to boot. Revenues were up 11% last quarter on a year over year basis, and management boosted their outlook, and expected net store addition plans for next year. Up 15% year to date, Starbucks is trading at the high end of the industry at 30x earnings, though its historical average is closer to 25x. Still, this valuation leads us to be cautious, especially given continued weakness and poor sales in Europe. Billionaire Ken Griffin – founder of Citadel Investment Group – was one of Starbucks’ big investors last quarter (check out Griffin’s newest picks).
Beam Inc (NYSE:BEAM) saw its sales up 8% in 2011 and another 8% is expected by the end of 2012. Beam has an impressive product portfolio with a range of brands, from stable names such as Jim Beam and Maker’s Mark to higher growth brands like Knob Creek and Effen Vodka. Beam trades at the high end of the industry on a P/E (27x) and P/S (3.9x) basis, being up 20% year to date. We see the industry as having positive prospects with a rise in consumer spending, but remain cautious that this stock’s valuation is high. Billionaire Bill Ackman is Beam’s largest fund shareholder with over 20 million shares (check out Ackman’s latest picks).
Kodiak Oil & Gas Corp (NYSE:KOG) is an explorer and producer of oil and natural gas that appears to be trading a bit rich for Chilton’s tastes. Trading at nearly 40x earnings, Kodiak is trading well above other mid-level explorers Oasis Petroleum (28x) and Northern Oil and Gas (20x); this also holds true on a P/S basis. We see Kodiak’s focused operations as a negative, being heavily reliant on its Williston assets. Another downside, assuming there will be a continued fundamental shift toward natural gas as a key energy source, is that over 85% of Kodiak’s resources are weighted toward oil. In spite of Chilton’s sale, Kodiak saw billionaire Steven Cohen of SAC Capital boosting his stake by 600% last quarter (see Steven Cohen’s key plays from Q3).
Eagle Materials, Inc. (NYSE:EXP) is a diversified materials company that is up over 100% year to date. A bloated valuation could be the reason that Chilton is looking to get out now. The uncertain rebound in the housing market continues to pressure the materials industry and this should continue over the interim. Eagle is well above other major materials companies on a P/S basis at 4.1x, compared to Martin Marietta (1.7x) and Cemex (0.6x) most notably. The fact that Eagle trades at 60x trailing earnings, with a five-year expected earnings CAGR of 8%, should be of concern to investors. Chilton’s selloff was betting against billionaire Jim Simons, who upped his stake 50% last quarter (check out Jim Simons’ top bets).
It appears that there were a few investments that no longer fit Chilton’s long-term focus, including Google, which has seen pressure from its Motorola Mobility acquisition, in addition to the issues discussed above. Beam and Starbucks are both showing strong abilities to grow despite a weak economy, but their relative richness should lead investors to remain cautious. Kodiak also appears to be ahead of itself on a valuation basis, and Eagle has seen a nice run up of late, where Chilton has likely decided to take his profits elsewhere. One of Chilton’s selloffs happens to be one of the top ten tech stocks other hedge funds love (check out all 10).
