Ricky Sandler founded Eminence Capital in 1998, at the age of 30. That wasn’t even his first stint as a hedge fund manager; he and Wayne Cooperman had previously co-founded Fusion Partners, though the two soon found that they could not coexist as investors. Sandler is a CFA charterholder and a graduate of the University of Wisconsin. Eminence now has about $3.6 billion in assets under management.
Sandler keeps track of a company’s value, of course, but puts just as much emphasis on a company’s quality and growth potential. In contrast to some value investors, he might prefer a good company at a so-so price to a low-quality company at a cheap price; he likes to see a combination of substantial undervalation and future growth in equity value per share. His highest-conviction positions tend to be those where he not only likes the combination of quality and value but also sees a catalyst in the sense that the market’s perception of the company will change in the medium term.
When we look at Eminence’s most recent 13F filing, we see a cluster of stocks where the fund’s position is about $100 million and then three stocks where the fund has more capital at risk- one at about $130 million, one at about $160 million, and one at about $330 million. We’d conclude based on Sandler’s investment philosophy that these are three companies where he sees this potential catalyst, rather than being more confident that they are undervalued in fundamental terms than he is for the rest of his top picks. There had been significant buying at the top two positions last quarter. Read on for a quick take on the five largest positions in Eminence’s portfolio at the end of September or see the full list of his stock picks.
Google Inc (NASDAQ:GOOG). Eminence owned about 430,000 shares of Google, up 41% from three months earlier. The stock’s trailing P/E is 22- demonstrating that the fund doesn’t hold too closely to traditional value criteria- but it’s reasonable to expect that the search business will continue to grow, as well as that Google will get earnings growth through improving the recently acquired Motorola Mobility business. Google had been the second most popular stock among hedge funds in the third quarter (see the rest of the top ten).
CME Group Inc (NASDAQ:CME). The fund’s position in CME increased by over 400% to a total of 2.8 million shares. Recent financial performance at CME has not been good, with revenue and net income both down over 20% last quarter compared to the third quarter of 2011. Analyst expectations are for continued earnings decline, judging by the trailing and forward P/Es of 11 and 15, respectively. Renaissance Technologies, founded by billionaire Jim Simons, was also buying the stock last quarter (find more stocks Renaissance likes).
eBay Inc (NASDAQ:EBAY). Eminence owned 2.7 million shares of eBay. Billionaire Stephen Mandel’s Lone Pine Capital had cut its stake slightly but still had about 13 million shares in its own portfolio at the end of the quarter (check out Mandel’s favorite stocks). eBay trades at 17 times trailing earnings and has been turning in good earnings growth. The stock is up 59% in the last year.
Tyco International Ltd. (NYSE:TYC). Tyco’s last fiscal year ended in September, and the security and fire protection company is currently trading at a current-year P/E multiple of 16 based on analyst expectations and its market cap of $13 billion. Eminence reported owning 2 million shares of the stock. Citadel Investment Group, a fund managed by billionaire Ken Griffin, was another major shareholder (research more stock Griffin likes).
Thermo Fisher Scientific Inc. (NYSE:TMO). The laboratory instruments and equipment company rounded out Eminence’s five largest holdings by market value. It doesn’t look like a good value in terms of trailing earnings, but the forward P/E is only 12 and the business has seen recent growth on both the top and bottom lines. Thermo Fisher was one of Tiger Cub John Griffin’s Blue Ridge Capital’s top ten picks.
