Lee Ainslie’s Top Picks Returned 17% in the First Quarter 2012

In late February, we discussed the bullish bets of Lee Ainslie’s Maverick Capital at the end of 2011. In that article, we were bullish about most of the large positions Maverick held. We liked the top two positions, Tyco International Ltd (TYC) and Corning Inc (GLW). We also liked the mega-cap technology and banking stocks in its portfolio, such as the third and fourth largest positions – Apple Inc (NASDAQ: AAPL) and JP Morgan Chase & Co (NYSE: JPM).

Most of the largest positions of Maverick have already generated better-than-market returns over the first quarter of 2012.

The table below shows the YTD return of the largest 10 positions in Lee Ainslie’s Maverick Capital. They returned 17% on a weighted average basis, versus 12% for the S&P 500 index during the same period. The calculation assumes Ainslie did not increase or reduce the amount he invested in these positions over the first quarter.

The two best performing positions were Apple and JPMorgan.

In the previous article, we mentioned that the market did not give credit for Apple’s strong growth and was over concerned about the impact of the European debt crisis on JPMorgan, leading to the significant undervaluation of these two stocks. Now, although their prices have largely increased, we still see great growth potential in them as they still have attractive valuation levels.

Stocks with high growth rates usually have relatively high multiples – but Apple is an exception. Its earnings are expected to grow at over 20% annually over the next couple of years, yet its forward P/E ratio is only about 14.

JPMorgan’s story is a bit different. Its earnings are expected to grow at a stable rate of about 6.8%. It is expected to earn $4.76 per share in 2012 and $5.52 per share in 2013. Currently it is trading at $46.12 per share, so its forward P/E ratio is below 10. John Paulson, John Griffin, and Andreas Halvorsen were also bullish about JPMorgan.

There are three positions on the list above underperformed the market over the first quarter: Corning Inc, Apollo Group Inc (NYSE:APOL), and Urban Outfitters Inc (URBN). Luckily, Ainslie reduced his stakes in these three positions over the fourth quarter last year, boosting his overall returns.

We are still favorable about Corning though. Although it underperformed the market by about three percentage points, it is up 9.06% since the beginning of this year. Moreover, it is trading at low multiples. The company’s current P/E ratio is only about 8. Its EPS in 2012 and 2013 is expected to be $1.34 per share and $1.49 per share, versus $1.76 per share for the trailing 12-month. Over the long term, the company is expected to grow at about 8% annually, versus 16% for the industry average. The conservative earnings outlook explains the weaker-than-market performance of the stock over the past three months.

Considering the growing demand for LCD televisions and the fact that the company has no direct competitors in the US Display Technologies segment, we are not going to change our recommendation about Corning. We still think it is a good stock to invest in for the long-term. Besides Ainslie, Richard Chilton and Jim Simons were also in favor of Corning. Simons even boosted his stakes by 129% over the fourth quarter last year.

On the other hand, we do not like Apollo or Urban Outfitters. Although Apollo has a low P/E ratio of 8.53, its sales are deteriorating. The company’s revenue declined by 4% in FY 2011 and is expected to decrease by another 12% in FY 2012. Apollo is also suffering from declining earnings. It is expected to make $3.36 per share in 2012 and $3.21 per share in 2013, versus $4.33 per share in 2011. We are also not very bullish about Urban Outfitters. The company looks to be relatively overvalued compared with its peers. Its P/E ratio is around 25, versus 21 for the industry average. Its forward P/E ratio is about 19, also higher than the 14 for its main competitor Gap Inc (GPS) and 13 for rival Abercrombie & Fitch Co (ANF).

Overall, Ainslie’s large positions performed quite well over the first quarter. Four out of his top five positions beat the market during this period. And, we believe Corning, the only underperformed stock among the top five positions, is able to generate better-than-market return over the long term.