Joel Greenblatt, founder of Gotham Capital, is a value investor with a focus on special situations. Not only is Greenblatt the managing partner of Gotham, but he is also the inventor of the quantitative investment strategy, Magic Formula Investing, and author of The Little Book that Beats the Market.
Greenblatt’s true philosophy is finding cheap, good companies and looking for deep value with a catalyst. Outlined below are five stocks that Greenblatt was buying up during the first quarter–let’s check out some of his most interesting stock picks (check out Greenblatt’s high yielders).
Greenblatt’s largest addition to his portfolio and now his fund’s top stock pick is Warner Chilcott Plc (NASDAQ:WCRX). This company is a leading specialty drugmaker that focuses on women’s health care and dermatological pharmaceuticals.
Warner’s 2009 acquisition of The Procter & Gamble Company (NYSE:PG)‘s global branded-prescription pharmaceutical business greatly broadened Warner’s product portfolio. The acquisition allowed Warner to enter the gastroenterology market with Asacol and the urology market with Enablex. In other areas, Warner’s birth control drug, Lo Loestrin FE, was launched in early 2011 and sales of the drug doubled to $42 million in 4Q 2012.
However, Warner Chilcott Plc (NASDAQ:WCRX) appears to be a merger-arbitrage play for Greenblatt, where Actavis has agreed to acquire Warner in an all-stock transition; Actavis plans to offer 0.16 shares per Warner share. Based on current prices and if the deal goes through, there is still 3.3% upside for Warner Chilcott Plc (NASDAQ:WCRX) investors.
Game time
In second is the video-game retailer GameStop Corp. (NYSE:GME). The video-game retailer was down nearly 20% last week on worries that its used-game segment might be in trouble, after the announcement that Microsoft Corporation (NASDAQ:MSFT) might limit the ability for packaged video games to be used on multiple systems.
Analysts expect revenue to be down some 7% in fiscal 2013, but only flat in 2014. However, what should help lift GameStop Corp. (NYSE:GME) and some of the other major video game retailers is the introduction of new hardware offerings, such as the Xbox One, in 2013. As well, longer term, the company should perform nicely with its transition to new revenue streams that includes digital content and used mobile devices.
GameStop Corp. (NYSE:GME) also pays investors a 3.1% dividend yield. Based on its current valuation, with a forward P/E of 9.6 and a solid long-term expected EPS growth rate, the game retailer’s PEG ratio comes in low at only 1.1.
A bad buy
An interesting addition to Greenblatt’s portfolio includes Seagate Technology PLC (NASDAQ:STX), now his sixth-largest holding. This company designs and manufactures hard disk drives for consumer and enterprise computing.
Seagate’s core business has been in decline as the demand for disk drives is hurt by the emergence of tablet computers, which use solid-state drives. Seagate posted March-ended quarterly EPS of $1.26 compared to $2.52 for the same period last year. This came as sales fell 4% sequentially.
