Bernard Horn has been investing in global equities since graduating from the Massachusetts Institute of Technology’s business school in 1980. Polaris Capital Management, his current fund, was founded in 1995 and recently reported about $4 billion under management.
Because of its global nature, Polaris has a particularly wide universe of stocks to invest in. Horn and his team like to narrow down the colossal number of publicly traded companies by using proprietary screening techniques to identify which ones have an attractive level of discretionary cash flow- cash flow from operations less maintenance capital expenditures- in relation to their market value. Polaris is a believer in the “margin of safety” argument for value investing, namely that avoiding large downside risk can be a driver of above-average returns, and companies trading at a low multiple of this discretionary cash flow figure will be similarly safe to those with low P/E or EV/EBITDA multiples. Beyond that point Polaris’s analysis becomes more qualitative, analyzing the company’s position as well as its financials.
Our analysis of the fund’s disclosed positions is that many of them tend to cluster in the $30 to $50 million range, and even the largest positions don’t have much more capital than that. As a result the portfolio is not particularly concentrated; in a way this is another conservative decision, with the fund’s fortunes being less dependent on any particular company. Changes in position size from quarter to quarter also appear very limited compared to many other funds. Here is a quick look at the five largest holdings in Polaris’s most recent 13F filing (see more of Horn’s favorite stocks):
Infosys Ltd (NYSE:INFY). Infosys was the fund’s top pick, as it increased its holdings by 33%. The India-based business management and technology consulting company has a market capitalization of $25 billion, which is 14 times its trailing earnings. This is due to a 21% fall in the stock price over the last year despite the fact that revenue and earnings were up modestly in the third quarter compared to the same period in 2011. AQR Capital Management, managed by Cliff Asness, was buying the stock as well.
Teva Pharmaceutical Industries Ltd (NYSE:TEVA). Polaris owned 1.7 million shares of the Israeli provider of generic pharmaceuticals. Teva is a Street darling: its trailing P/E is 15, but the forward P/E is 7 and the five-year PEG ratio is 0.9. This suggests that consensus is for solid earnings growth in the next several years, even though its stock price is also down in the last year. Jeffrey Altman’s Owl Creek owned 3.1 million shares at the end of the third quarter (check out Owl Creek’s stock picks).
Carter’s, Inc. (NYSE:CRI). The baby and children’s apparel company- Carter’s owns the OshKosh brand- was another of Horn and his team’s top picks. Hedge fund Viking Global reported a position of 3.6 million shares; the fund is managed by Tiger Cub Andreas Halvorsen (find more stocks Viking Global likes). At 23 times trailing earnings Carter’s is less attractive from a value perspective and there is considerable short interest in the stock.
Frontier Communications Corp (NASDAQ:FTR). Frontier is another of the fund’s favorite stocks, and another which has declined in price over the last year; the most recent data has over 20% of the outstanding shares held short. It is also priced for growth with trailing and forward P/Es of 29 and 17, respectively, despite lower revenue in the third quarter versus a year earlier. Tiger Global Management, another Tiger Cub hedge fund, was another investor in the stock.
Marathon Petroleum Corp (NYSE:MPC). Polaris had about 940,000 shares of the refining and marketing company in its portfolio. The stock has doubled in the last year, but it still trades at only 8 times trailing earnings. Growth expectations are high here as well, but they yield a five-year PEG ratio of 0.5 due to what is already attractive pricing. Billionaire Steve Cohen’s SAC Capital Advisors initiated a position in Marathon in the third quarter (research more of Cohen’s stock picks).
