A 13G filed with the SEC has reported that Citadel Investment Group, which is managed by billionaire Ken Griffin, owns a total of 4.6 million shares of QLogic Corporation (NASDAQ:QLGC), a semiconductor product designer with a market capitalization of $1 billion. This gave Citadel ownership of 5% of the total shares outstanding. See more stock picks from billionaire Ken Griffin.
13G filings have both advantages and disadvantages compared to quarterly 13Fs: 13Fs provide a much more comprehensive picture of what a hedge fund owns, as opposed to 13Gs which are only filed when the fund has a large ownership stake (which is extremely rare in the case of large-cap companies). As a result they are well suited for the development of investment strategies; for example, we have found that the most popular small cap stocks among hedge funds offer an average excess return of 18 percentage points per year (learn more about our small cap strategy). However, 13Fs are only filed quarterly and the most recent ones are now two months out of date, and arguably any particular pick is more of an “idea” than a dependable guide to what a fund actually owns.
Wall Street analysts currently expect 79 cents in earnings per share for the forward fiscal year ending in March 2014, which would make for a forward P/E of 14. In addition, about half of the market cap is accounted for in cash as QLogic Corporation reported almost $500 million in cash and marketable securities on its balance sheet. Cash flow from operations has declined, but was still $100 million in the first nine months of the current fiscal year. This makes for a trailing EV/EBITDA multiple of 5.2x. Renaissance Technologies, founded by billionaire Jim Simons, had a smaller position of 1.9 million shares at the end of December (find Renaissance’s favorite stocks). Cliff Asness’s AQR Capital Management added shares over the course of the fourth quarter and closed 2012 with a total of 1.7 million shares in its portfolio (check out more stocks Asness was buying).
We can compare QLogic to Emulex Corporation (NYSE:ELX), Cisco Systems, Inc. (NASDAQ:CSCO), Intel Corporation (NASDAQ:INTC), and Broadcom Corporation (NASDAQ:BRCM). Emulex, possibly the closest peer, has also been experiencing falling earnings and now has cash representing a large share of its valuation. In forward earnings and cash flow terms it is slightly cheaper than QLogic though the business is smaller and potentially a riskier investment. Intel and Cisco both trade at 10 times forward earnings estimates, and have market capitalizations of over $100 billion. Intel has been struggling, with a small decline in revenue in the fourth quarter of 2012 versus a year earlier causing a 27% drop in earnings, but that stock also pays a dividend yield above 4%. Cisco continues to report growth numbers and we think it’s worth considering as a value stock. Broadcom’s performance has not been particularly good recently, and as a result the trailing P/E is above 20; however, the sell-side expects the company to recover and return to a higher level of earnings.
It’s interesting to see Citadel getting involved with the company, but from our perspective QLogic’s financials don’t make it attractive enough to be worth buying. The substantial cash of course prevents it from being a short as well, but value investors might be better off considering Cisco or possibly Intel.
Disclosure: I own no shares of any stocks mentioned in this article.
