In its Q2’18 investor letter, the RiverPark Large Growth Fund discussed Northrop Grumman Corporation (NYSE: NOC) and other stocks. In this article, we’re focusing on Northrop Grumman whose shares, according to the fund’s letter, “detracted from performance for the quarter as the defense sector, as a whole, reacted negatively to the lessening of tensions with North Korea as well as sector rotation away from this previously outperforming category.” However, the fund believes that the company is “well positioned to outgrow the industry given its focus on aerospace, high technology content and the potential synergies from the Orbital ATK acquisition.” Let’s take a look at the fund’s comments about NOC.
NOC shares detracted from performance for the quarter as the defense sector, as a whole, reacted negatively to the lessening of tensions with North Korea as well as sector rotation away from this previously outperforming category. NOC’s decline in the quarter was despite the positive news of the company closing its Orbital ATK acquisition and management increasing guidance for both EPS and FCF.
We believe that the defense industry’s fundamentals have improved substantially over the past year given the anticipated increase in defense spending following several years of sequestered budgets. We also continue to believe that Northrop is well positioned to outgrow the industry given its focus on aerospace, high technology content and the potential synergies from the Orbital ATK acquisition. NOC has about 20% of its revenue coming from aircraft programs, such as the B-21, E-2D, and the F-35 (up 30% year-over-year in the first quarter), which are growing at more than 20% per year – a significantly higher rate than overall defense budget growth (anticipated to be 5-6% per year). NOC also has the potential to win a large portion of the pending $100 billion Ground-Based Strategic Deterrent intercontinental ballistic missile weapon system program that is expected to be awarded in 2019. Although the Street expects mid-to-high single-digit revenue growth for the company, relatively in-line with the expected defense budget growth, we believe the company can comfortably exceed that growth rate while also further expanding its margins through increased scale and strong execution. We continue to look for double-digit operating income growth from NOC in the years to come that should continue to be augmented by strategic acquisitions, debt pay down and continued share buybacks from more than $2 billion of annual free cash flow.
Shares of Northrop Grumman Corporation (NYSE: NOC) are up 3.58% since the start of the year. The stock, over the past three months, has moved up 1.33% while the share price has jumped 13.27% over the past 12 months. NOC – which was closed at 312.26 on Wednesday – has a consensus average target price of $360 and a consensus average recommendation of ‘OVERWEIGHT’, to analysts polled by FactSet Research.
If we look at our database, Northrop Grumman isn’t a very popular stock among hedge funds covered by Insider Monkey. As of the end of the second quarter of 2018, there were 41 funds in our database with positions in the company.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
Free Report Reveals
Warren Buffet's Secret Recipe
Our Price: $199FREE
We may use your email to send marketing emails about our services. Click here to read our privacy policy.