Ryanair Holdings plc (NASDAQ:RYAAY) was one of the stocks that Robertson mentioned owning in the interview. The “lowest cost producer in the world” has two big red flags attached to it that will scare off investors: it is a Europe-focused airline. Budget air carriers are trading at premiums to the major carriers in the U.S. and Ryanair actually carries moderate multiples as well: it trades at 14 times trailing earnings and 13 times forward earnings estimates. Robertson apparently believes that Europe will recover and that Ryanair’s pricing will drive earnings growth. During the second quarter earnings were down 29% from a year earlier, though revenue was up. We’re skeptical here- why not pay considerably less for a major U.S. airline as the industry consolidates, potentially driving up prices?
In an interview about a year ago with CNBC, Robertson had recommended credit card stocks, singling out Mastercard and Visa (read our discussion of Robertson’s picks). Apparently he’s carried out a balance transfer: in this interview he named Capital One Financial Corp. (NYSE:COF) out of all the credit card stocks. Capital One, quantitatively, looks like a very good investment: its revenue and earnings were each up at least 35% in the third quarter versus a year earlier, and yet the stock carries a trailing P/E of only 11. Wall Street analysts expect substantial earnings growth in 2013 as well. We’d compare it to other credit card stocks first to make sure it’s the best one, but on an absolute basis it seems like a buy.
Ocwen Financial Corporation (NYSE:OCN) was another stock that the hedge fund legend named. Ocwen is a $4.8 billion market cap mortgage loan servicing and asset management company. Its stock is up 156% in the last year as the mortgage business appears to be recovering. Its second quarter results showed a doubling in revenue versus Q2 2011, which contributed to a 70% rise in net income. It trades at 9 times forward earnings estimates and a five-year PEG ratio of 0.6, indicating that the sell-side is projecting strong earnings growth over the next several years. We’d want to study the company more closely, but it looks like an interesting find. Billionaire Leon Cooperman’s Omega Advisors owned 3.6 million shares of the company at the end of June (find more stocks that Omega owned).
Robertson also recommended against steel stocks, including United States Steel Corporation (NYSE:X) and AK Steel Holding Corporation (NYSE:AKS), declaring them overvalued barring a very strong economic recovery (something he doesn’t foresee, though his Ryanair pick in particular seems to indicate he is ruling out a sustained European and global recession). Both companies are unprofitable on a trailing basis, but both are expected to rebound next year with analyst consensus implying forward P/E multiples of 10. As such, the market seems to be skeptical as well- players are trading these stocks as if the analysts are being too optimistic. With revenue down in their most recent quarterly reports, and betas in the 2.3-2.4 range, our impression is that Robertson’s interpretation is right: buy them if you are extremely bullish, don’t buy them if you’re not.
For the most part we like Robertson’s picks here. The one that we are struggling with is Ryanair, as we continue to be impressed by the low multiples at airlines such as Delta, US Airways, and United Continental; even Spirit offers cheaper pricing for investors and revenue growth with exposure to the Americas rather than Europe.
