P2 Capital Partners’ Top Stock Picks

P2 Capital Partners tends to focus on smaller cap public companies and uses a private equity-like approach to identify and value potential investment opportunities. P2’s founder, Claus Moller, previously worked at Blum Capital where he was a managing partner. Moller also has an MBA degree from Harvard Business School. Read on to learn more about the top five positions the fund reported on its 13F filing for the second quarter of 2012 or see more of P2′s stock picks.

The fund’s largest position was its 5 million shares of UTi Worldwide Inc. (NASDAQ:UTIW). UTI provides supply chain solutions and services to business customers, including freight forwarding and logistics and distribution. In the second quarter of UTI’s fiscal year, which ended in July (the company has a fiscal year ending in January), it saw double-digit percentage declines in revenue and earnings compared to the same period a year ago. At a $1.4 billion market capitalization, UTI trades at 20 times trailing earnings with consensus earnings from Wall Street analysts implying a forward P/E multiple of 15. We would like to see better results from the company, but if it can meet the sell-side’s growth trajectory it could be a good value.

P2 also liked ACI Worldwide Inc (NASDAQ:ACIW) as the fund increased its stake 10% to a total of 1.5 million shares. ACI is a business services company whose cash management and payments processing offerings help support electronic payments. The market has priced in high growth at ACI, as its trailing P/E is 54; however, the sell-side is in agreement that the company can deliver this growth as the forward P/E based on their earnings estimates drops to 20. Columbus Circle Investors, managed by Donald Chiboucis, more than doubled its own holdings of ACI during the second quarter and owned about 820,000 shares at the end of June.

Bally Technologies Inc. (NYSE:BYI) was another of P2’s top picks. Moller and his team reported a position of 1.2 million shares in the $2 billion company, which produces gaming devices for casinos. The stock has done well over the last year, rising 69% against the S&P 500’s 25%. It now trades at 21 times trailing earnings, though the sell-side expects strong growth over the next few years. Bally’s forward P/E comes in at 13, and its five-year PEG ratio is 0.8. However, the fourth quarter of the company’s last fiscal year (which ended in June) showed fairly modest earnings growth, at 4% over the same period the year before; while revenue growth was higher, at 15%, we are worried the company might not do as well as expected.

Chuck Royce

P2 owned 1.4 million shares of Pool Corporation (NASDAQ:POOL), a provider of maintenance products and other pool supplies. Pool is another stock that has had a good run over the last year, up 62%, and it now trades at 24 times trailing earnings. It has shown decent growth recently, and analyst expectations imply a forward earnings multiple of 20. This stock is probably a bit too pricy unless an investor has very good feelings about the industry. Royce & Associates was another investor in the stock at the end of June.

Animal healthcare company VCA Antech, Inc. (NASDAQ:WOOF), which operates a number of veterinary hospitals and a medical laboratory, was another of P2’s favorite stocks. The fund reported a position of 2.5 million shares. VCA Antech’s margins dropped last quarter, as earnings were down 13% from a year ago even though revenue rose by 17%. The trailing P/E is currently 19, but analysts expect $1.50 in earnings per share for 2013; assuming this comes to pass, the forward P/E is 14. This might make for more of an interesting growth stock but investors should check to make sure the company will resume its growth in the near future. Billionaires Tom Steyer and Israel Englander are among WOOF investors (see Englander’s top picks).

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