Louis Navellier is the Chairman and Founder of Navellier & Associates. The firm focuses on growth investments and employs a system to grade stocks. The two factors in Navellier’s stock picking formula are fundamentals and buying pressures. Navellier believes that fast growing companies are healthy, thriving and well managed. According to Navellier, his “A” graded stocks returned 1267.9% for the past 13 years, versus 61% for SPY. Recently Navellier released its latest holdings in a 13F filing. Let’s take a closer look at the most bullish bets of Navellier and decide whether it makes sense for investors to imitate these stock picks.
Chipotle Mexican Grill Inc (CMG): This is the largest position in Navellier’s portfolio. At the end of last year, the fund had $77 million invested in this stock. CMG operates restaurants throughout the United States. It also has two restaurants in Canada and two in England. Over the next few years, the openings of new restaurants and the growth in same-store sales will drive the revenues and earnings of the company. Besides Navellier, there were 29 other hedge funds with CMG positions at the end of the third quarter. Jim Simons’ Renaissance Technologies also had over $200 million invested in this stock.
We are not very bullish about CMG. Its valuation is not very attractive. The stock has a forward P/E ratio of 35.31. Though its EPS is expected to grow at over 20% per year over the next five years, its P/E ratio for 2014 is around 23, still relatively high compared with its peers.
We think McDonalds Corp (MCD) is much attractive than CMG. MCD is also a large position in Navellier’s portfolio. The fund reported owning $61 million worth of MCD shares at the end of last year. We prefer MCD because it has more exposure to foreign markets, especially the fast growing emerging markets. The company operates in more than 100 countries around the world, with a large percentage of its revenues deriving from foreign countries. As a result, MCD can provide better protection against a decline in US Dollar. Moreover, MCD has reasonable valuation multiples. It has a forward P/E ratio of 15.71 and is expected to grow at 10.44% annually over the next five years. So its P/E ratio for 2014 is 12.9, compared with 18.4 for Yum Brands Inc (YUM). MCD is also quite popular among hedge funds. Thirty-nine hedge funds disclosed owning MCD in their 13F portfolio at the end of September. Jim Simons like MCD as well. His Renaissance Technologies had $200+ million invested in MCD as well. Ric Dillon and Boykin Curry also had over $100 million invested in the stock.
A few other large positions in Navellier’s portfolio include Autozone Inc (AZO), International Business Machines Corp (IBM), and Estee Lauder Companies Inc (EL). Navellier had over $50 million invested in each of these positions at the end of last year. AZO and IBM looks appealing when it comes to valuation. AZO has a forward P/E ratio of 13.43 and IBM has a forward P/E ratio of 11.73. Both stocks’ EPS are expected to have double-digit growth per year over the next five years. IBM also has an attractive international footprint. It also has a competitive position in the industry and enjoys the benefits of economies of scale. If the economy recovers and investors become less risk-averse, we expect IBM’s price to increase by 60% over the next three years. Warren Buffett’s huge investment in IBM supports our conviction about this stock.