Monsanto Company (MON) Is a Top Pick of Bain Capital’s Brookside

In late July, Brookside Capital, which serves as a long/short equity hedge fund within the larger Bain Capital asset management organization, filed its 13F for the second quarter of 2013 with the SEC, and Monsanto Company (NYSE:MON) was included.

This filing discloses many of the fund’s long equity positions in U.S. stocks as of the end of June. Insider Monkey tracks 13Fs, both as part of our work researching investment strategies (for example, we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) and to see how different funds are playing the current market. We don’t recommend blindly following any hedge fund’s picks, but their holdings can serve as initial investment ideas for further research. Read on for our quick take on Brookside’s three largest positions by market value or compare these picks to those in previous filings.

The fund increased its stake in Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) to a total of 2.3 million shares, making the salon and cosmetics retailer its new largest holding. The first quarter of the company’s fiscal year ended in early May, with revenue and earnings each rising about 20% versus a year earlier. Same store sales growth in the salon and retail segment was 5%, demonstrating that revenue growth was driven primarily by an increased number of locations.

It’s a good sign for Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) that the increased store count was not accompanied by significantly higher costs, and in fact there appears to have been little change in net margins. This suggests that, at least for now, the market is not saturated and opening new stores should continue to increase the company’s profits. However, with a trailing earnings multiple of 35 the market seems to have already accounted for high growth prospects for Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA).

Another of Brookside’s top picks is PPG Industries, Inc. (NYSE:PPG), a specialty chemicals company which provides performance and industrial coatings. Last quarter there was little change in either revenue and earnings compared to the second quarter of 2012, with both figures coming in within 6% of their levels a year ago. PPG Industries, Inc. (NYSE:PPG) is valued at 17 times forward earnings estimates, which seems to be a somewhat aggressive valuation if business is in fact stable; at that valuation, investors should generally expect to see at least modest earnings growth over the next several years. As a result PPG Industries, Inc. (NYSE:PPG) might not be that good a value play at this time.

Brookside was also buying Monsanto Company (NYSE:MON), the agriculture technology and chemicals company, during Q2: the fund closed June with 1.3 million shares in its portfolio. In Monsanto Company (NYSE:MON)’s most recent quarter, which ended in May (the third of the company’s fiscal year), revenue was about flat compared to the same period in the previous fiscal year and net income was down slightly. This contrasts with better performance earlier in the fiscal year; the company reported that in the first nine months of the FY earnings grew by 20% compared to the prior year period. According to the 10-Q, the troubles last quarter were due to lower revenues from sales of soybean and cotton seeds and traits, and the fact that the corn seed and trait business failed to keep up with higher costs. These three product lines account for about 60% of Monsanto Company (NYSE:MON)’s total revenue.

Markets are optimistic about Monsanto Company (NYSE:MON) over the long term, and as a result it carries trailing and forward P/Es of 22 and 19 respectively. If profits resume growing at an annual rate of about 20% then the company would be well worth investigating further, but given the most recent report it might be best to wait for more information just to be more certain growth has not ground to a halt. In the first quarter of the year billionaire Stephen Mandel’s Lone Pine Capital reported a position of 6.7 million shares in Monsanto Company (NYSE:MON) (find Mandel’s favorite stocks).

Monsanto Company (NYSE:MON) should be watched for further developments, but probably not bought now given the weak results from last quarter. Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) has been growing nicely, and as has been mentioned it’s a positive sign that the company continues to grow not only sales but also net income at a rapid rate by opening new stores. While the stock does feature a premium valuation it may therefore be worth looking into.

Disclosure: I own no shares of any stocks mentioned in this article.