What Does Billionaire Dan Loeb See In Tiffany & Co. (TIF)?

Several weeks after the end of each quarter, hedge funds and other major investors file 13Fs with the SEC, which are then disclosed to the general public. We track these filings, using the included information to help us develop investing strategies; for example, we’ve found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). Of course, we also like to review filings from top managers such as billionaire Dan Loeb of Third Point to see what trades they were making. When we look at Third Point’s most recent 13F (see the full list of Loeb’s stock picks), we noticed that the fund initiated a position of 2.7 million shares in Tiffany & Co. (NYSE:TIF) between January and March. This made Third Point the largest shareholder of Tiffany out of the filers we track.

The $10 billion market cap jeweler and jewelry retailer grew its revenue by 9% in its most recent quarter (which ended in April, and was the first of Tiffany & Co. (NYSE:TIF)’s fiscal year) compared to the same period in the previous fiscal year. Comparable store sales were up moderately with some growth coming from an increased number of locations. However, with costs rising as well, earnings per share were only up by a penny to 65 cents. Sales growth occurred in all four major geographies, with the highest growth rate (of 15%) occurring in Asia-Pacific (a segment which excludes the much slower-growing Japan). Growth rates were also high in the Middle East, though that is still only a small source of business for Tiffany & Co. (NYSE:TIF).

Its current market capitalization places Tiffany at 23 times trailing earnings, which seems aggressive considering how low net income growth was last quarter. Analyst growth expectations imply a forward P/E of 19, suggesting that investors are quite optimistic about the company’s prospects over the long term. We’d note that as a provider of jewelry Tiffany & Co. (NYSE:TIF) tends to be dependent on the prosperity of the overall economy, as shown by its beta of 1.9. Chilton Investment Company, managed by billionaire Richard Chilton, reported ownership of about 730,000 shares in its own 13F (find Chilton’s favorite stocks).

The closest peers for Tiffany & Co. (NYSE:TIF) are Signet Jewelers Ltd. (NYSE:SIG) and Zale Corporation (NYSE:ZLC). Zale Corporation (NYSE:ZLC) has risen over 250% in the last year, as the company has broken into the black. Its market capitalization is only about $300 million, but with a current price of over $9 and close to 700,000 shares traded per day there should be sufficient dollar volume. It trades at 23 times forward earnings estimates. Signet Jewelers Ltd. (NYSE:SIG) is somewhat closer to value territory than either Zale Corporation (NYSE:ZLC) or Tiffany, with trailing and forward P/Es of 15 and 13 respectively. With double-digit percentage increases on both top and bottom lines last quarter compared to a year ago, we think it is worth a closer look from investors.