Initially seeded by legendary Tiger Management, Hound Partners got its start in 2004 with Jonathan Auerbach and Scott McLellan at its helm. Both men had illustrious backgrounds as analysts, but it was Mr. Auerbach who kept this long/short equity fund alive when McLellan split off to form Marble Arch Partners in 2007. With close to a billion dollars in assets under management, Hound Partners is known to pile big money into its largest convictions, and the following five stocks go far to prove that point:
First up is W. R. Grace & Co. (NYSE:GRA), a specialty chemicals and materials manufacturer with a global presence. Hound saw a 10% drop in their position from Q2 2012 to Q3 2012 but remains heavily invested with over $100mm employed. Ex-partner Scott McLellan has staked a similar view with his Marble Arch Investments Fund (compare his top five holdings here). Both revenue and earnings growth this past quarter were in the red compared to the same quarter last year, and with the highest PEG amongst the list (2.84), the stock price may see a correction in 2013, especially after such a strong push in the second-half of 2012. Long-term prospects are promising, but we advise waiting to jump in only on significant dips.
The software titan Google (NASDAQ:GOOG) is next on the list, and it is no stranger on many hedge funds’ rosters. A venerable Who’s Who of fund managers have struck their claim in Google, including billionaires Ken Fisher and Ken Griffin. (See which other multi-billion dollar funds have a GOOG play here.) With continued heavy buy ratings from analysts all over the Street, Google is expected to keep up their abnormally high EPS of 32, and we expect the stock to break $800 within the next year. Thirty-three analysts weighed in to give GOOG that one-year price target, delivering 12% of upside if those expectations materialize.
Continue reading to see the rest of the list.
The third largest position indicated by Hound’s last 13F is Fleetcor Technologies, Inc. (FLT). The payment solution provider showered Hound with double-digit returns in 2012, and an investor who hopped on in the beginning of last year would have rode a whopping 72% wave in their favor. JP Morgan recently downgraded FLT from overweight to neutral on January 11th, and the fact that the current stock price exceeds analysts one year mean price target supports this. (Read here to see how often FLT shows up in other portfolios).
Offshore contract driller Ensco PLC (NYSE:ESV) remains a top five pick from almost a year prior, and Auerbach saw his position size grow significantly during most of 2012, only to be reduced by 36% in the third quarter (see why Steve Cohen and Ken Fisher did the same here). Earnings grew each quarter in 2012, with the last two quarters giving a double-digit surprise. Analysts love the stock and give it a strong overweight support, and the most modest Forward P/E of the group (currently trading at 9) give this stock some room to grow. From an income perspective, Ensco’s modest dividend of 2.5% is another reason to give it a nod.
Carter’s, Inc. (NYSE:CRI) completes Hound Partners list of top holdings and stands out as another big winner for the fund. The children’s clothing manufacturer saw incredible stock and earnings growth in 2012, beating analyst estimates every quarter and garnering upgrades from the likes of bulge brackets Citi, BofA/Merrill Lynch, and Goldman Sachs. Auerbach added just a bit more to his position in Q3 2012, amounting to only 1%, and we agree this is a safe bet versus piling on more, as the next period’s estimates are more relaxed at $0.86 and the price-to-book valuation of 3.7 hint at possible overpricing at current levels. (See where CRI lies on other hedge funds’ lists here.)
Disclosure: I do not own shares of any stocks mentioned in this article.
