John Griffin, former president of Tiger Management, founded Blue Ridge Capital in 1996. Griffin employs a traditional long/short strategy and was one of the top hedge fund managers in 2007, having returned 65% that year. Between 2007-2009, three of the toughest years in recent memory, Griffin averaged almost 18% annually. Blue Ridge filed its 3Q 13F in mid-November, revealing what the fund bought and sold during the third quarter. Griffin sold off entire positions in three stocks that were in his 2Q top 20, but also showed renewed interest in a couple discretionary stocks, Ralph Lauren Corp (NYSE:RL) and The Walt Disney Company (NYSE:DIS).
Regarding the former, Griffin upped his 2Q stake by 75%, making Ralph Lauren Blue Ridge’s 9th largest holding. Ralph does trade on the high-end of its industry's valuation at 21x earnings, compared to major peers Coach and VF Corp, but the retailer’s robust 15% expected annual five-year growth rate gives investors, including Griffin, a reason to get excited. Helping drive this growth will be continued expansion into handbags, footwear and denim. Geographically, growth should be driven by Asia, with noted expansion into Japan.
Griffin took a new position of almost three million Disney shares during 3Q, making Disney Griffin’s 19th largest 13F holding. 3Q EPS came in at $0.68, compared to $0.59 for the same quarter last year, with TV—ESPN and Disney—helping fuel earnings growth. We believe that Griffin is intrigued by Disney’s product mix and geographical diversification, with various revenue streams and an international presence. The entertainment company has the best in industry debt-to-capital position, but still trades below its peers at only 15x earnings, compared to an industry average of 20-25x.
Griffin sold off three companies that perhaps have already met their near term top, including Lowe’s Companies, Inc. (NYSE:LOW), JPMorgan Chase & Co. (NYSE:JPM) and Netflix, Inc. (NASDAQ:NFLX). Griffin dropped all of its 7.8 million Lowe’s shares in 3Q, which previously made up 3.3% of Griffin’s 2Q 13F portfolio. It's possible that Griffin began to question the housing recovery and decided to invest his capital elsewhere, but with the destruction that Hurricane Sandy has left along the East Coast, we believe that the home improvement and building materials store could get a boost in the near term. Although Lowe’s is up 25% year to date, it has still underperformed Home Depot by 40%. Both retailers trade in line on a P/E basis, but we believe that Lowe’s is undervalued on a P/S basis at 0.6x, compared to Home Depot’s 1.3x.
Griffin sold off over 6 million shares of JPMorgan during 3Q, which was his 13th largest holding in 2Q. Although Griffin is not all that excited about JPMorgan, the bank is one of the ten most popular stocks amongst hedge funds for 3Q. JPMorgan is trading at $39.50, above its tangible book value per share of around $33, but it does pay the highest dividend of the major bank stocks at a yield of 3%. Even so, net interest income is expected to fall 7.0% in 2012, on a lower net interest margin. In 2013 a further decline of 2.1% is expected. JPMorgan has also suspended its share repurchase program for the time being. Check out why billionaire Julian Robertson's fund also slashed its JPMorgan stake. We believe that Griffin is questioning the banking recovery, as he also cut his Citi stake.
Griffin also sold off his 2.5 million Netflix shares, which had made up 2.5% of his 2Q 13F. We believe that Blue Ridge saw no more upside beyond the pop the stock got from having Icahn take a 10% stake in the company. Check out more about Icahn's Netflix interest. For the third quarter, Netflix was down 20%, but including the month of October—when Icahn announced his stake—the streaming company is up 20% since the end of 2Q. Revenue growth is expected to slow from nearly 50% in 2011 to 14% in 2012 and 2013, but the company still trades at over 100x earnings. Other near term headwinds include increasing costs and uncertainty with Netflix’s attempt to enter the international market. These do not include increasing competition from the likes of Amazon, Hulu and HBO Go, all potentially putting pressure on margins.
To recap: Griffin sold out of companies that he feels might be overvalued and losing steam, but upped stakes in those that can benefit from a return to discretionary spending and a pickup in Asian economies. Although Griffin’s sale of Lowe’s might be premature, there are limited near term catalysts for JPMorgan and Netflix. With regard to Disney and Ralph Lauren, it appears that these companies can excel in 2013 due to strong growth prospects. Check out all of Blue Ridge’s top stocks.