Hound Partners Top Stock Picks

The third largest position indicated by Hound’s last 13F is Fleetcor Technologies, Inc. (FLT). The payment solution provider showered Hound with double-digit returns in 2012, and an investor who hopped on in the beginning of last year would have rode a whopping 72% wave in their favor. JP Morgan recently downgraded FLT from overweight to neutral on January 11^th, and the fact that the current stock price exceeds analysts one year mean price target supports this. (Read here to see how often FLT shows up in other portfolios).

Offshore contract driller Ensco PLC (NYSE:ESV) remains a top five pick from almost a year prior, and Auerbach saw his position size grow significantly during most of 2012, only to be reduced by 36% in the third quarter (see why Steve Cohen and Ken Fisher did the same here). Earnings grew each quarter in 2012, with the last two quarters giving a double-digit surprise. Analysts love the stock and give it a strong overweight support, and the most modest Forward P/E of the group (currently trading at 9) give this stock some room to grow. From an income perspective, Ensco’s modest dividend of 2.5% is another reason to give it a nod.

Carter’s, Inc. (NYSE:CRI) completes Hound Partners list of top holdings and stands out as another big winner for the fund. The children’s clothing manufacturer saw incredible stock and earnings growth in 2012, beating analyst estimates every quarter and garnering upgrades from the likes of bulge brackets Citi, BofA/Merrill Lynch, and Goldman Sachs. Auerbach added just a bit more to his position in Q3 2012, amounting to only 1%, and we agree this is a safe bet versus piling on more, as the next period’s estimates are more relaxed at $0.86 and the price-to-book valuation of 3.7 hint at possible overpricing at current levels. (See where CRI lies on other hedge funds’ lists here.)

Disclosure: I do not own shares of any stocks mentioned in this article.