We track quarterly 13F filings from hundreds of hedge funds, including billionaire Ken Griffin’s Citadel Investment Group (see Griffin’s stock picks). Even with the inherent delay in 13Fs (the most recent batch reports long equity positions as of the end of March), we think that there are still a couple ways to make use of the information. We’ve found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year, and think that more strategies are possible as well. The most recent filing can also be compared to the previous one to see what top managers were buying last quarter; we don’t recommend blindly following these picks, but they can be sources of potential ideas for further analysis. It turns out that Citadel more than doubled its holdings of Visa Inc (NYSE:V) between January and March, to a total of 1.4 million shares.
Visa Inc (NYSE:V)’s operating revenues grew by 15% in its most recent quarter (its fiscal Q2 ended in March of 2013) compared to the same period in the previous fiscal year, and despite rises in costs the company’s pretax income grew at the same pace. Earnings fell over the same time frame, but this was entirely due to a higher effective tax rate. Adjusted earnings per share are expected to rise considerably during the current fiscal year, to $7.48 (up from $6.20, which would represent a 21% increase); we’d note that significant buybacks took place in the first half of Visa’s fiscal year, potentially boosting EPS.
Visa Inc (NYSE:V) is best compared to Mastercard Inc (NYSE:MA) as the two are the leading credit card brands, but we would also consider American Express Company (NYSE:AXP), Capital One Financial Corp. (NYSE:COF) and Discover Financial Services (NYSE:DFS) as peers. Mastercard experienced an 8% rise in revenue in the first quarter of 2013 versus a year earlier, and as in Visa Inc (NYSE:V)’s case its margins did well. It too carries a premium valuation, however, with trailing and forward P/Es of 25 and 19 respectively. It’s also noteworthy that, like Visa, Mastercard actually has a fairly low beta at 0.6.
American Express also looks a bit pricy to us, at 19 times its trailing earnings, and that company’s recent results have been fairly modest. Specifically, last quarter its revenue and net income each changed by less than 3% compared to the first quarter of 2012. Between that and the valuation, we would avoid the stock. Capital One and Discover are closer to value territory, with trailing P/Es in the 10-11 range, and therefore don’t need particularly strong performance going forward to justify their current valuations. Capital One, which also trades at a small discount to the book value of its equity, has been experiencing a drop in pretax and net income but might be worth tracking in the event the company recovers. As for Discover, that company has at least been experiencing growth and with analysts not calling for a particularly challenging 2014 it might be worthy of further research.
For the most part, there’s a fairly straight correlation between valuation and recent performance in this peer group, though American Express and Capital One seem like stocks to avoid at least for now. We aren’t sure that we’d want to depend on Visa or Mastercard continuing their impressive growth numbers, however, despite Griffin’s apparent confidence in Visa’s ability to do so, and so a more in depth look at the industry would likely start with Discover.
Disclosure: I own no shares of any stocks mentioned in this article.
