George Soros is one of the most successful investors of the modern financial world, and while he’s most famous for making $1 billion in the Black Wednesday UK currency crisis, the Hungarian-American is quite the stock picker. Soros Fund Management currently manages a 13F portfolio of close to $7 billion, and is overweight in the technology sector. Here’s a full look at George Soros's portfolio, conveniently organized for your viewing pleasure.
Aside from well known picks like Wal-Mart and General Electric, Soros is also bullish on the mid-sized data storage company, NetApp Inc. (NASDAQ:NTAP), with a $142 million position at the end of last quarter. Between Q1 and Q2 of this year, Soros has held steady on NetApp, electing to let the stock comprise nearly 2% of Soros Fund Management's portfolio. Ignoring Soros's array of fixed-income investments, NetApp is currently the magnate's fifth favorite equity. Let's take a closer look at the company, and at some motivations behind Soros's bullishness.NetApp has been a poor investment since the start of 2012, losing 17.6% while the data storage industry as a whole has returned 16.5%. Many of the company's peers in this business segment are larger, more well-known names like SanDisk Corporation (NASDAQ:SNDK) and Seagate Technology PLC (NASDAQ:STX), in addition to EMC Corporation (NYSE:EMC) and Teradata Corporation (NYSE:TDC). Out of these competitors, only SanDisk has been in the red in 2012, with Seagate, EMC, and Teradata generating an average return of 44.3% over this time. Clearly, there have been better options in data storage, so the question is: why does Soros remain invested in an industry laggard?
Well, to answer that question, we first have to look at the company's bottom line. NetApp has beat the Street's estimates in the past two quarters by an average margin of 6.7%, driven by, as the company's CEO Tom Georgens put it, advancements in "technology and partnerships." At the end of the current quarter, which NetApp is expected to release results for in mid-November, the company is forecasted to hit EPS of 48 cents a share. By the end of its current fiscal year, NetApp is projected to reach earnings of $2.10 a share, which is actually below 2011 levels, but analysts do expect this growth to be corrected by 2013.
It's not quite clear why the company is providing lower guidance for this current year, as bearish growth drivers range from a spotty macro environment to a weakness in the converged stack market, but one thing is clear: NetApp can still provide solid growth over the intermediate term. While there are obvious questions about the company's competitive alignment within its industry, five-year EPS estimates still expect 12%-13% annual growth, which is more or less in line with Sandisk (13.0%) and EMC (13.9%), and above the likes of Seagate (7.7%) quite significantly. Only Teradata, at 15.9%, is truly expected to blow its peers out of the water, and even this company has some valuation concerns.
Getting to that, NetApp currently trades at an modest forward earnings multiple of 14.2X, slightly above Sandisk (13.4X) and EMC (12.7X), while Seagate (4.3X) is much cheaper due to its lower growth forecast. As expected, Teradata (22.2X) is the most expensive of the bunch on a multiples basis, but we must factor EPS growth into the equation to truly understand how NetApp's valuation compares to its peers.
The stock currently sports a PEG ratio of 1.72; typically any figure between 1 and 2 signals a fair valuation. More importantly, though, this is below the likes of Teradata (2.00), but below the rest of the bunch discussed above. Seagate is the only stock we've discussed that has a PEG ratio below 1.0, signaling that it may be undervalued at the moment.
In comparison to its own historical values, however, we can see why Soros may be bullish on the company, at least from a multiples standpoint. NetApp currently trades at an earnings discount of 44% in comparison to its five-year averages, and sports similar undervaluations in book (-47%), sales (-40%), and cash flow metrics (-46%), despite the fact that the company has generated above average EPS, revenue, and cash flow growth since the recession.
While the lack of specificity regarding NetApp's lower earnings estimates in 2012 certainly are troubling, investors can be getting a good buy if they, like Soros, believe that this is a one-time hiccup. The company still expects to expand its footprint in the ever-growing data storage industry above double-digits over the next five years, and is trading at a rather attractive valuation at the moment, especially in comparison to its own historical averages.
Besides George Soros, other hedge funds that are currently long NetApp include: Lee Ainslie, Ken Griffin, and Jim Simons. For a complete look at the sentiment surrounding this data storage company, continue reading here, on Insider Monkey.