Jeffrey Ubben is the founder of ValueAct Capital and he has served as the Chief Executive Officer and Chief Investment Officer of the company since 2000. Prior to that, Ubben spent five years at Richard Blum’s Blum Capital Partners, working as a Managing Partner. We like tracking ValueAct Capital because of its ability to focus on a long-term basis. The fund usually makes only three to four new investments in one year. It often holds about 15 positions and the average holding period for each position is about three years.
Recently, ValueAct released its most recent holdings in a 13F filing. The fund had 14 positions in its 13F portfolio at the end of December. ValueAct sold out two positions but did not purchase any new positions over the fourth quarter. Let’s take a closer look at a few large positions of ValueAct and decide whether it makes sense for investors to imitate these stock picks.
Motorola Solutions Inc (MSI): This was the largest position in ValueAct’s 13F portfolio at the end of last year. The fund had $1.1 billion invested in MSI at the end of 2011. A few other hedge funds were also bullish about MSI. For example, Carl Icahn’s Icahn Capital LP had about $1.8 billion invested in MSI at the end of last year. George Soros, Cliff Asness, and Louis Navellier were also in favor of this stock.
MSI provides communications products and services to both enterprises and government customers. For the fourth quarter of 2011, its government division accounted for about 67% of the company’s total revenue. The government division has lower growth compared with the enterprise division. Its revenue was up about 5% over the past year, versus 10% for the enterprise division. In the future, it is expected to grow at about 3-4% per year, compared with 8% for the enterprise division. Overall the company is expected to grow at about 6-7% annually in the next five years. Though MSI’s government division has lower growth rate, it has higher margin and it is expected to benefit from the analog to digital conversion for public safety networks. MSI sold its networks division to Nokia Siemens Networks (NSN) in April last year for $975 million. In January 2011, the company also spun off its mobile devices division, which is currently called Motorola Mobility (MMI). The spin-offs usually attract event-driven investors. That’s why over 20 hedge funds are bullish about the stock. MSI’s current P/E ratio is 23.96, versus 22.75 for the average of its peers. The company announced in July last year that it had authorized $2 billion for share repurchases. Two months ago it authorized an additional $1 billion for share buybacks. The total share repurchase authorization of $3 billion explains the slightly higher current P/E ratio of the company compared with its peers. There are several other technology stocks that are expected to grow at much higher rates and have much lower PE ratios. Our favorite technology picks are Apple (AAPL) and Microsoft (MSFT) which have low double digit forward PE ratios.
Valeant Pharmaceuticals International Inc (VRX): VRX was the second-largest position in ValueAct’s portfolio. The fund had over $700 million invested in VRX. We have recommended VRX in our previous article about insider purchases. In that article, we mentioned that VRX was closed at $53.86 on March 6. Now, the stock is trading at $54.60 per share, up 1.4% from its closing price on March 6. It isn’t too late to buy this stock.
Adobe Systems Inc (ADBE): Over the fourth quarter last year, ValueAct boosted its ADBE stakes by 47%. As of December 31, 2011, the fund had $696 million invested in ADBE. ADBE was also quite popular among hedge funds. At the end of last year, there were 24 hedge funds with ADBE positions in their 13F portfolios. For instance, Bill Miller’s Legg Mason Capital Management had over $70 million invested in ADBE. Billionaires Glenn Dubin and Jim Simons were also bullish about ADBE.
ADBE has been continuously developing new products or new versions of its existing products. The new versions of Creative Suite and Acrobat contributed a lot to Adobe’s growing sales and subscriptions. The company has also been expanding itself by continuously acquiring other companies, including leading software developer Macromedia, web analytics company Omniture, Swiss enterprise content management software provider Day Software, and data management platform company Demdex. These acquisitions have helped ADBE to achieve a more diversified portfolio of products as well as a broader range of customers. We expect the company will continue benefiting from its new products and acquisitions, thus enjoying strong growth in the next couple of years. Currently ADBE has a P/E ratio of 20, versus 27 for the average of its peers. The company is expected to earn $1.98 per share in 2012 and $2.21 per share in 2013. Over the long term, its earnings are estimated to grow at above 10% per year. ADBE’s forward P/E ratio is about 12, also lower than the 20 for the average of the software industry.
A few other big positions in ValueAct’s portfolio are Moody’s Corp (MCO), Rockwell Collins Inc (COL), and C.R. Bard Inc (BCR). The fund had at least $500 million invested in each of these positions. These stocks all look attractive as their forward P/E ratios are both below 15. We especially like MCO. It not only has low valuations, but also has strong growth potential. Analysts expect its earnings to grow at above 12% per year.
