Patrick McCormack’s Tiger Consumer Management is one of the many hedge funds seeded by Julian Robertson, the founder of Tiger Management, and like other of these so-called “Tiger seeds” it is housed at the same Park Avenue address Robertson’s legendary firm once called home. Obviously, as the name implies, Tiger Consumer Management is focused on the consumer sector.
“We do not engage in market timing and therefore do not change our net exposure based on a market or economic view (last quarter’s letter discusses how we determine gross and net exposure). The two governing factors to our growth are liquidity and research capacity,“ explained McCormack in a 2010 letter to investors. “We have and will continue to maintain a highly liquid portfolio. At present, assuming our trades accounted for 20% of average daily volume for each stock, 100% of the portfolio could be liquated [sic] in ten days or less. From a research capacity perspective, we currently have about 300 consumer companies in our active universe and will seek to maintain and grow this over time as we increase assets under management.”
On February 14, Patrick McCormack filed Tiger Consumer Management’s quarterly holdings with the SEC. The fund had 32 positions, collectively valued at $1.43 billion. These 32 stocks is a great place to look for outstanding consumer stocks. Tiger Consumer narrowed the list to 32 companies from 300. Let’s see which of these stocks look promising.
There were a lot of changes in the Tiger Consumer Management portfolio. Herbalife (HLF) had been the fund’s top position at the end of the third quarter, with a value of over $51.88 million. As of the end of the third quarter, the value of the position had fallen to just under $50.02 million; the number of shares held in the company (967,990) did not change. More significantly though, Herbalife slipped far down the rankings – a fact due in part to a decline in its value but it was also to a rash of new positions.
The largest of these is a 2.16 million share or $80.51 million stake in Kraft Foods (KFT), which Patrick McCormack initiated during the fourth quarter. We think that was a good call. The share price for Kraft ranged from $31.88 to $37.93 during the fourth quarter. When the stock opened on February 14, it was trading at $38.44 a share, with a mean one-year target estimate of $41.00 a share (range $35 to $46). In addition to the upside, Kraft offers little risk (beta of 0.57) and a $1.16 dividend (3.00% yield). Plus, it is priced low relative to its future earnings, with a forward P/E of 15.24. Over the last 52 weeks, Kraft has gained 25.20% compared to a gain of less than 2% for the S&P 500 over the same period.
This is much better performance than that was seen in Kraft’s closest competitors – ConAgra Foods (CAG) and General Mills (GIS). ConAgra had the best performance of the two, returning 19.32% over the last 52 weeks. The company is priced well at 13.64 times its forward earnings but it just doesn’t have the upside. The stock opened trading on February 14 at $26.66 a share with a one-year target estimate of $27.60 a share. ConAgra does offer a decent dividend of 96 cents (3.60% yield), but it just isn’t enough for earnings growth estimates of just over 7% per annum over the next five years when Kraft is forecasted to have roughly 10% earnings growth. General Mills returned 10.04% over the last 52 weeks and is priced at 14.10 times its forward earnings, but the outlook going forward is dismal. Analysts expect its earnings will grow by less than 8% per annum over the next five years. Even looking just one year out, General Mills is expected to reach a target of $42.19 a share, but that’s a fairly small increase from $39.36, its opening price on February 14, even counting in General Mills’ $1.22 dividend (3.10% yield). Overall we like Kraft on two levels. It has a stable, relatively fast growing business, and priced modestly. It also offers a decent dividend which we expect to go up significantly over the next 10 years. We recommend Kraft to conservative investors. Kraft won’t make you rich but will help you stay rich. Warren Buffett knows this too and has a huge position in the stock.
In addition to its stake in Kraft, Patrick McCormack’s largest positions at the end of the fourth quarter include a $71.01 million position (1.73 million shares) in Dollar General Corp. (DG), a $70.71 million position (907,617 shares) in McKesson Corp. (MCK) and a $67.87 million position (2.80 million shares) in Kroger Co. (KR). The positions are a far cry from what Tiger Consumer’s portfolio at the end of September. At the end of the third quarter, McCormack had had just 1.36 million shares in Lone Pine Capital favorite Dollar General, valued at $51.36 million, and 2.02 million shares in Kroger, valued at $44.46 million. Ken Griffin’s Citadel Investment Group is a fan of Kroger. The position in McKesson was initiated during the fourth quarter. McKesson is a top pick for Larry Robbins’ Glenview Capital and Lee Ainslie’s Maverick Capital. We are most bullish about McKesson. Expanded Medicare Part D drug coverage will add 2-3% per year to McKesson’s volume. The stock will also benefit from the expansion of health insurance coverage when Obamacare kicks in 2014. Investors should buy the stock while its forward PE ratio is still below 13.
