Boykin Curry’s Eagle Capital’s Top 10 Stock Picks

In this article we presented Eagle Capital’s top 10 stock picks. Click to skip ahead and see Eagle Capital’s Top 5 Stock Picks.

Eagle Capital is a New York based hedge fund that was founded by Beth and Ravenel Curry III in 1988. Right now, their son Boykin is in charge of the fund. Instead of employing a 2 and 20 fee structure, Eagle Capital charges 1% flat fee for relatively small clients, and 0.75% for bigger clients. The main reason behind this fee structure is that Eagle Capital is a long only fund. It holds around 30-40 securities focusing on the large-cap equities and it follows a bottom-up research approach. Its AUM was around $32 billion at the end of 2019. At the end of the third quarter of 2020 Eagle Capital’s 13F portfolio was nearly $28 billion.

The primary strategy of Eagle Capital is finding undervalued stocks with unrecognized growth potential and invest in long term prospects. In 2008, Eagle Capital’s net return was ‐35.6%, where S&P 500 was ‐37.0%, and Russell 1000 was ‐36.8%. In 2014, the returns of Eagle Capital, S&P 500, and Russell 1000 were 12.3%, 13.7%, and 13.5% respectively.  In 2015, Eagle Capital and S&P 500 were the same (1.4%), and Russell 1000 was -3.8%. In 2016, the returns were 10.1%, 12.0%, and 17.3% respectively. It indicated a little bit lower, but next year in 2017, its net annual return was 23.1%, where S&P 500 was 21.8%, and Russell 1000 was 13.7%. It showed a good performance that year. In 2018, the returns were -5%, -4.4%, and -8.3% respectively.  Keeping in mind that small-cap stocks have been underperforming large-cap stocks since 2015, Eagle Capital seems to generate a small amount of alpha after fees.

Boykin Curry IV had previously managed a portfolio at Kingdon Capital before coming to Eagle around the turn of the millennium. Boykin Curry IV, 45 years old, graduated from Yale University with a degree in Economics in 1988 and holds an MBA from Harvard Business School. Eagle Capital managed to beat the S&P 500 Index for 7 straight years between 2007 and 2013. We believe Eagle Capital is able to do that because it has a longer investment horizon than other funds and can hold its nose and buy unloved but cheap stocks.

Recently the company focuses on the Finance sector stocks. In the last quarter, it boosted its Wells Fargo (WFC) position by 60% accounting for 4.02% of the fund’s overall 13F portfolio. WFC shares has already gained 36.74% price since the last filling. It also increased its Aon PLC (AON) position by 19% to 5.68% of the overall 13F portfolio, and the stock gained more than 4.5% price since the last filling. According to the 13F report for Q3, 2020, its 29.6% of 13F portfolio is in the communication sector, 29.2% is in the finance sector, 15.6% is in the consumer discretionary sector, 13.5% is in technology, and 4.2% is in the health sector.

We track hedge funds like Eagle Capital to identify promising stock picks. This is the first step in our idea generation process. Once we identify a promising investment idea, we spend a week or two going through its quarterly and annual filings, earnings call transcripts, its competitors’ earnings call transcripts, etc. and determine whether the stock is attractive an investment as about 2 dozen stocks we identified and recommended in our monthly newsletter. This rigorous research approach helped us to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017 (see the details here).

Now, we are going to go through Eagle Capital’s top 10 holdings which account for 60.9% of its 13F portfolio.

10. UnitedHealth Group (NYSE: UNH)

The largest U.S health insurance company’s price fell tremendously during the beginning of the COVID-19 pandemic and reached $194.9 from $305.3 in a month. Currently UNH shares trade at $337.

The company recently has beat analysts’ expectations in its fourth-quarter 2020 report. Its revenue rose 7.5% generating an EPS of $2.52 versus analysts’ estimates of $2.40. Eagle Capital allocated nearly 4% of its overall 13F portfolio to United Health. Polen Capital talked about UNH in its 2020 Q3 investor letter:

“UnitedHealth Group is both the leading health insurance company in the U.S. and the largest primary care provider. It has been building an integrated healthcare model that provides medical care and health insurance to individuals and corporations and to Medicare and Medicaid beneficiaries. Insurance accounts for roughly half of the company’s profits, and medical care delivery and technology accounts for the other half.

We believe this integrated, data-driven model is the future of healthcare delivery in the U.S. and should lead to lower medical costs over time without sacrificing quality of care. UnitedHealth is moving to a practice of rewarding providers that demonstrate strong wellness and health outcomes and away from a “pay for consumption of medical care” model that treats people only when they are already sick and where costs are very high. By focusing on preventative care and wellness, medical utilization could decline, and costs should follow.

We expect UnitedHealth Group to be able to grow earnings per share at a low-to-mid-teens rate over time with low cyclicality. In addition, we see little chance of a government-run health system in the U.S. due to the massive cost, especially at a time when federal budget deficits are tremendously high, plus several other factors. As such, we believe scaled players with strong integrated models that are already being utilized to run large parts of government programs will likely continue to play a large role for many years to come.”

9. Wells Fargo & Company (NYSE: WFC)

Eagle Capital allocated 4.02% of the overall 13F portfolio to Wells Fargo. WFC shares were trading around $53 at the start of 2020. Its stock fell sharply in March after it announced to pay $3 billion to resolve criminal probes related to its fraudulent sales practices. In the same month, the bank’s chairwoman Betsy Duke stepped down from her position amid heightened pressure from regulators over Wells Fargo’s stumbling attempts to fix the misleading consumer practices. Duke stepped down after leading the board for more than a year.

Wells Fargo shares traded flat for the most part of 2020, touching a low of $20.76 on October 29, a couple of weeks after reporting disappointing results for the third quarter. Overall, the stock lost about half its value during 2020.

The company was off to a decent start in 2021, with the stock trading higher for most of the days. However, Wells Fargo shares fell 7.80 percent on Friday after reporting fourth-quarter revenue below the consensus forecast. Q4 revenue came in at $17.93 billion, down 9.7 percent on a year-over-year basis, and below analysts’ average estimate of $18.12 billion. Nevertheless, Q4 earnings increased to $2.99 billion, or 64 cents per share, beating the consensus forecast of 59 cents per share. Meanwhile, the bank warned that asset sales and low interest rates will affect its revenue in the coming quarters. Wells Fargo ranked 24th among the  30 most popular stocks among hedge funds.

Argosy Investors talked about WFC in its 2020 Q4 investor letter:

“Most of us are familiar with Wells Fargo (WFC); they are one of the top 5 banks in the U.S. with nearly $2 trillion in assets. The last 5 years have not been good to Wells. They are on their 3rd CEO during that time, and the current one stays in New York City despite headquarters being in San Francisco. Wells Fargo opened millions of fake accounts for customers over several years, driven by an incentive system that compensated branches based on their account openings. This goes to show you the perverse power of incentives, if not properly balanced. To atone for their sins, Wells Fargo is operating under an asset cap which prevents the bank from growing and must demonstrate stronger risk management. Not that long ago, Wells Fargo was the most admired large bank on Wall Street, with the highest valuation and glowing reviews about its low cost of funds driving sustainably high returns on equity. Now, it has the lowest valuation on Wall Street and no one talks about the good old days with Wells.

I believe that there is nothing fundamentally wrong with Wells Fargo’s business that cannot be fixed, and once they can return to normal operations without the fake account nonsense then I expect they will return to earning returns slightly lower than historical norms. If Wells Fargo uses 100% of its earnings to repurchase share over the next 3 years, Wells can retire 25% of its outstanding stock. By 2023, WFC could earn $6+ per share. At 10x earnings, a very low multiple given the rest of the stock market trades at 22x earnings, Wells Fargo could fetch $60 per share. WFC’s current share price is $33 and our cost basis is around $25 per share. If it takes 5 years for Wells to get out of the penalty box and trade at $60 per share, we can earn a 20% annual return on our investment, including dividends.”

8. Marriott International, Inc. (NASDAQ: MAR)

Eagle Capital’s Marriott International, Inc. (NASDAQ: MAR) investment underperformed the market over the last 12 months. Despite selling 4% of its position in the September quarter, Eagle Capital still allocated 4.37% of its 13F portfolio to this pandemic casualty stock.

Marriott has 7,500 properties in 132 countries under 30 leading brands. Currently, the company announced that it is going to expand by nearly 100 hotels in the Asia-Pacific region in 2021. Last year it added 75 properties in the region. Though the company’s revenue and EPS decreased over the last two years, the expansion will support bringing the stock back to growth.

7. Facebook, Inc. (NASDAQ: FB)

Eagle Capital trimmed 6% of its Facebook Inc. position during the September quarter. The fund first bought Facebook stock in Q3 2018 at an average price of ~$165. Now the stock price is $265. Currently, FB stock is 5.54% of Eagle Capital’s 13F portfolio. Oakmark Funds commented on Facebook in its 2020 Q4 investor letter a few days ago:

“Facebook currently sells at approximately $273 per share or 26 times consensus 2021 earnings estimates of $10.47 per share. That might not seem excessive for such a high-quality company, but it certainly would not meet our value criteria if that was the whole story. But it’s not. For starters, Facebook is expected to have $29 per share of cash at the end of 2021, and, as we all know, cash currently earns almost nothing. Subtracting cash from the stock price, we are only paying $244 per share for the business or 23 times earnings.

There is more. Analysts believe that WhatsApp, a popular messaging service owned by Facebook, reports a GAAP loss, yet its subscribers have quadrupled since Facebook acquired the service in 2014. If WhatsApp‘s current subscriber base was valued at the same price-per-subscriber as in 2014, it would now be worth $31 per Facebook share. Using analyst forecasts for revenue several years out, that $31 per share seems reasonable as it roughly matches Facebook’s current price-to-sales multiple.

In addition to WhatsApp, Facebook has also made significant investments in augmented reality/virtual reality (AR/VR)—about $5 per share by our estimate—and we believe those investments are, at a minimum, worth what they cost. AR/VR generates little revenue today and it is likely losing at least $1.00 per share. So, when we factor in both WhatsApp and AR/VR, we should deduct another $36 from Facebook’s stock price and add to earnings the estimated $1.50 of losses they generate.

After these calculations are figured in, we are paying $208 for core Facebook/Instagram with consensus estimates of $12 in 2021—a P/E of only 17x. For a high growth, strong cash generator like Facebook, an adjusted P/E of less than the S&P 500 strikes us as a bargain. And, if you haven’t yet tried the new $299 Oculus Quest 2 virtual reality gaming system (by Facebook), you’re in for a treat.”

6. Aon Plc (AON)

The hedge fund increased its AON position by 19% in Q3 2020. The position in the insurance company accounted for 5.68% of Eagle Capital’s overall 13F portfolio. We recently featured AON in 10 best insurance stocks to buy article. Here is what we said:

“Aon offers insurance, financial risk-mitigation and pension services. The company was created in 1982 as a result of the merger of Ryan Insurance Group and Combined Insurance Company of America.

In the third quarter, Aon said its operating margin increased 340 basis points to 18.5%, while EPS jumped 27% in the quarter to reach $1.18. Tom Gayner’s Markel Gayner Asset Management is one of the 52 hedge funds having stakes in Aon as of the end of the third quarter.  The fund owns 37,000 shares of the company, worth $7.63 million.”

Click to continue reading and see Eagle Capital’s Top 5 Stock Picks.

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Disclosure: None. Eagle Capital’s Top 10 Stock Picks is originally published at Insider Monkey.