GameStop, Adobe and More Pitched by Leading Investors in Toronto

The Sohn Investors/Capitalize for Kids Conference recently took place in Toronto, Canada, during which a number of top investment managers pitched their best ideas to a gathering of their peers. In this article we’ll take a look at four long stock ideas presented at the conference from three different investment firms, as well as one short idea.

After you’ve finished reading about GameStop, one of the featured stocks in this article, consider some related reading by checking out a list of The 10 Best Selling Video Game Franchises of All Time.

At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

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Aaron Cowen of Suvretta Capital is bullish on Restaurant Brands International Inc (NYSE:QSR), which falls under the quick service restaurant category. The company operates approximately 19,000 restaurants in over 100 countries and is the owner of the popular Burger King and Tim Hortons brands. Cowen likes the business model of the company as a franchisor of brands. He thinks that the company has strong management and that Burger King’s merger integration with Tim Hortons is going well. The company has decreased its operating expenses significantly post-merger and could deliver $3 in FCF per share. He also thinks that the company may be looking out for another acquisition which could further add value to the stock. His target price for the stock is $75, which is 70% higher than its current price. As per our database, 31 funds held Restaurant Brands International Inc (NYSE:QSR) shares worth $3.01 billion on June 30, amounting to 31% of the company’s total outstanding stock.

Besides Restaurant Brands International Inc (NYSE:QSR), Aaron Cowen is also bullish on Adobe Systems Incorporated (NASDAQ:ADBE), which is one of the world’s largest software companies. Adobe operates through two main business segments. The first is the Creative Cloud, which is used by 13 million users to create webpages and is growing by 15%-20% per year. Cowen believes that Adobe Systems Incorporated (NASDAQ:ADBE) essentially has a monopoly with this offering. Secondly, Adobe does digital marketing, helping companies place ads on websites and measure the ROI on their marketing effects. Cowen likes the company because it underwent a significant transformation in 2013, through which it transformed itself into an SaaS (Software as a Service) business model. While its margins fell in the short-term due to upfront costs, Cowen thinks that they will increase into the mid-40s by 2018. He also thinks that the company could do $7 in earnings per share by 2018, and believes that gives the stock a target price of $170-$180 in a base case scenario. The number of funds in our system with a long position in Adobe Systems Incorporated (NASDAQ:ADBE) declined to 58 as of June 30 from 63 a quarter earlier. The value of their holding also declined to $2.37 billion from $3.01 billion quarter-over-quarter.

We’ll check out three more stocks pitched in Toronto on the next page, including one which took a tumble shortly after this conference.

Dan Farb of Highfields Capital advocated buying Franklin Resources Inc. (NYSE:BEN), more famously known as Franklin Templeton Investments, which is a global investment management organization. The company offers investment products such as equity, hybrid, fixed-income, and cash management funds and accounts, including alternative investment products. The $19 billion company is trading near its 52-week-low, as shares have fallen by 18% over the last year. Farb is positive about Franklin because it has two-times as much exposure to commodities and emerging markets as other funds, and is undervalued at 12.7-times earnings when compared to the 14-times earnings at which other fund managers trade at. Farb expects the $700 billion in assets under management held by Franklin to stabilize, allowing it to grow its earnings. Franklin Resources Inc. (NYSE:BEN) also has cash of $18 per share, which provides downside cushion. The Johnson family owns 37% of the total equity, which aligns well with shareholder interests. 32 hedge funds in our system owned shares of Franklin Resources Inc. (NYSE:BEN) at the end of June.

GameStop Corp. (NYSE:GME) is one of the world’s largest distributors of video games. Michael Gentile of Formula Growth is positive about GameStop because he thinks that virtual reality is a game changer and is not priced into the stock. He believes that the biggest competitive advantage of the company is its used games business, which GameStop does better than any other game retailer. Furthermore, he believes that physical sales still have an advantage over digital sales due to the fact that the games cost about the same price (in the case of new games), but gamers can sell their physical copies, meaning the cost to the gamer ends up being lower. However, Gentile’s slide did not seem to account for the fact that physical copies have taxes charged on them, while digital sales do not, and could also be subject to delivery charges, depending on how the gamer purchases their physical copy. And while used copies lower the price even further, digital sales tend to greatly outdo the prices of used games, which are generally only dropped by $10 at GameStop Corp. (NYSE:GME).

However, GameStop Corp. (NYSE:GME) also have a strong loyalty program, with 46 million members. GameStop’s stock has not done much over the last seven years and trades cheaply at 5.9-times earnings, and 3.5-times EV/EBITDA, while having a 19% FCF yield and 5.9% dividend yield. He thinks that the market is too fixated on its hardware and video game sales, which will account for just 19% of its gross profit by 2019, while its other divisions such as used game sales, its 1600 AT&T Inc. (NYSE:T) stores, and its collectibles business are being ignored by the market even though they are highly profitable. He has a price target of $50 for the stock which implies nearly 150% upside. However, it should be noted that shares fell by 11% yesterday after GameStop announced disappointing preliminary third-quarter results. The value of hedge funds’ holdings in this stock among the funds in our database declined by 12% during the second quarter to $344 million as of June 30.

WD-40 Co (NASDAQ:WDFC) is a global consumer products company with a market value of $1.42 billion which Gentile is bearish on, as he believes that WD-40 Co (NASDAQ:WDFC) is priced to perfection at a 29-times P/E, an 18.7 EV/EBITDA, and with a 2.4% FCF yield. Gentile pointed out that WD-40 was trading at around 19-times earnings between 2006 and 2012, which has now shot up 50%. He thinks that low interest rates and low oil prices have been the main drivers behind its increased valuation, and those tailwinds could be coming to an end. He is shorting the stock and will look to cover it at $75, which would imply a decline of about 27% from its current price. Hedge funds that we track were losing enthusiasm for WD-40 Co (NASDAQ:WDFC) in the second quarter as well, as just six remained shareholders of it on June 30, down from 11 a quarter earlier.

Disclosure: None