We maintain a database of quarterly 13F filings from hundreds of hedge funds and other notable investors, which we have used to research investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year). Some investors also like to use 13Fs as sources of initial investment ideas for further research. The most recent 13Fs are generally old, disclosing many long equity positions as of the end of March, but we can improve their utility as a source of investment ideas by looking for stocks that a fund has owned for at least two years. Read on for our thoughts on billionaire Richard Chilton’s Chilton Investment Company’s five largest positions from its most recent filing which were also among its top 30 picks at the end of March 2011, or see the full list of the fund’s stock picks over time.
Chilton and his team reported a position of 5.1 million shares in LKQ Corporation (NASDAQ:LKQ), a $7.7 billion market cap replacement auto parts distributor. Markets are pricing in high growth at the company, with LKQ Corporation (NASDAQ:LKQ)’s valuation giving it trailing and forward earnings multiples of 29 and 20 respectively. While the company’s revenue has been up at double-digit rates, going by recent reports, net margins have been shrinking and as a result earnings growth has been much more modest. Performance therefore doesn’t seem to be high enough to make it a buy.
Avago Technologies Ltd (NASDAQ:AVGO), a semiconductor company with a market capitalization of $9.6 billion, was another of Chilton’s long term stock picks. Like many of the other stocks listed in the filing, it is priced outside of value territory at a trailing P/E of 18. In addition, Avago Technologies Ltd (NASDAQ:AVGO)’s business has actually been struggling with both revenue and profits declining in its most recent quarterly report compared to the same period in the previous year. Wall Street analysts expect this trend to recover and EPS to increase next year, but investors should probably be skeptical.
Chilton also liked manufacturer of semiconductor devices Micron Technology, Inc. (NYSE:MU), disclosing ownership of 6.1 million shares as of the beginning of April. Micron Technology, Inc. (NYSE:MU) actually turned a small profit in the fiscal quarter ending in May 2013 after three consecutive quarters of net losses. While it is still unprofitable on a trailing basis, this is at least an improvement. The sell-side is highly optimistic about the forward fiscal year (ending in August 2014), expecting nearly $1 in earnings per share for a forward earnings multiple of 14.
Chilton Investment Company has maintained a significant stake in Cabot Oil & Gas Corporation (NYSE:COG) for the past couple of years. Markets are depending on Cabot Oil & Gas Corporation (NYSE:COG) achieving high growth in its earnings over the next several years; even with analysts expecting increases in EPS next year the stock is valued at 27 times consensus forecasts for 2014. Of course Cabot, as an oil and gas company focused on onshore U.S. shale plays, does have high growth prospects with revenue up 37% in the first quarter of 2013 versus a year earlier and earnings more than doubling.
Still, investors should be reluctant to invest in Cabot for the time being as large future increases in earnings are already priced in. The semiconductor related companies should also be avoided. While home improvement retailers shouldn’t be ruled out as a way to play housing and construction activity, The Home Depot, Inc. (NYSE:HD) doesn’t seem cheap and certainly should be compared to its peers and to other stocks tied to those trends.
Disclosure: I own no shares of any stocks mentioned in this article.
