David Gerstenhaber, one of the first tiger cubs, is the hedge fund manager for Argonaut Capital, and is responsible for one very disturbing forecast of the Eurozone’s future. Looking at Argonaut Capital’s most recent SEC filings for the second quarter of 2012, we see that the 13F portfolio is over weighted in the non-cyclical and technology sectors. The technology sector, which accounts for 31.6% of the manager’s reported holdings, is comprised mostly by 26.4% in the computer hardware industry, and 5.1% in the software and programming industry. The non-cyclical sector, which accounts for 28%, is comprised mostly by 18.4% in the tobacco industry, 4.7% in the non-alcoholic beverage industry, and 4.3% in the alcoholic beverage industry.
There are two technology stocks in Gerstenhaber’s top five holdings. Apple Inc. (NASDAQ:AAPL) represents 24.3% of his total holdings and is the largest stock in his 13F portfolio. Throughout 2012, Gerstenhaber has been adding to his position in Apple, and his fund now has 11,293 shares in the tech giant. Although Gerstenhaber continues to place bets in Apple in 2012, during the second half of 2011 the former tiger cub decreased his position in Apple from 17,538 shares to 8,040. Microsoft Corporation (NASDAQ:MSFT) is Gerstenhaber’s fourth largest holding and accounts for 5.4% of his 13F portfolio. The software giant was added to the Argonaut portfolio in the first quarter of 2012, and around 5,200 shares were sold during the second quarter.
Two tobacco companies are also in Gerstenhaber’s top five holdings. Philip Morris International Inc. (NYSE:PM) is the second largest holding in the Argonaut 13F portfolio. The company known for their Marlboro cigarettes comprises 12.5% of Gerstenhaber’s reported holdings, and he has added 15,500 shares mid-way through 2012 (Here is what you need to know about the company’s earnings). Altria Group, Inc (NYSE:MO) is the third largest interest in Gerstenhaber’s 13F portfolio and represents 5.9% of Argonaut. The holding company has various subsidiaries including Philip Morris USA Inc. The Coca-Cola Company (NYSE:KO) rounds out Gerstenhaber’s top five picks, and is the fifth largest stock holding. The beverage company accounts for 5.1% of Argonaut’s assets, and was added to the portfolio during the first quarter of 2012. During the second quarter, Gerstenhaber decreased his position in the owner of Coke by around 2,200 shares.
From a valuation standpoint, Apple is the only company trading below its 5-year average P/E. Microsoft, Philip Morris, Altria, and Coca-Cola are trading relatively close to their 5-year average P/Es and seem fairly valued. Looking at EV/EBITDA ratios, both Microsoft and Apple are the cheapest, and Coca-Cola is the most expensive among Gerstenhaber’s top five holdings. All of Gerstenhaber’s top five holdings except Microsoft have raked in impressive returns on assets and equity, with Philip Morris leading the way with a 26.74% ROA and a 339.69% ROE. Moving to margins, Apple has substantially higher operating and profit margins than their competitor Microsoft, and Altria has better margins than their peer Philip Morris. Coca-Cola is the definition of consistency and has displayed sturdy profit and operating margins. Year-to-date returns show that Gerstenhaber’s top five holdings have all been solid investments, and have displayed impressive results thus far through 2012. Apple, Gerstenhaber’s number one holding, has nearly been a double-bagger for him, returning 71.50%.
To recap: Gerstenhaber’s top five holdings account for over 53% of his 13F portfolio, which includes all of the positions the manager filed with the SEC as of Q2. Of that 53%, the technology and tobacco industries account for 48%. Year-to-date returns prove to investors that there isn’t always a need for diversification, at least in the short run. Investors don’t always have to try to pick the single and only the winner in an industry; Gerstenhaber showed that by placing the majority of his capital in only a few areas, he has been able to reap in high returns with a limited amount of trades.
