3 stocks this top hedge fund manager bought
L.Viking Global Investors’ senior hedge fund manager Ole Andreas Halvorsen bought more shares in industrial companies deer (NYSE: DE) and Fortive (NYSE: FTV) and elevator and escalator companies Otis (NYSE: OTIS) Earlier this year, according to SEC filings.
Halvorsen is a very successful long / short stock picker and his company currently manages $ 44 billion in assets, with a particular portfolio under management that started in 2008, the same year that the S&P 500 Index fell by almost 40%.
A quick look at the performance of the three industrials shows that Fortive has underperformed S&P 500while Deere and Otis outperformed.
Performance since the beginning of the year
Data from YCharts.
Should investors follow Halvorsen and his hedge fund into these stocks now? Let’s take a closer look at these three companies.
Let’s start with Fortive. The underperformance of this stock is somewhat surprising as its mix of industrial businesses enables its cyclical exposure to the improving economy. In addition, management has already raised the adjusted diluted EPS guidance for the full year from $ 2.40-2.55 in February to $ 2.50-2.60 in April.
Perhaps one reason for the underperformance is that Fortive is not the easiest company to understand. Around 40% of sales come from the Intelligent Operating Solutions (IOS) segment; the largest business within the company is the electronic test and measurement company Fluke. As such, the IOS plays with the growth of automation and digitization and the need to ensure security and reliability – not least to meet regulatory requirements in the industrial economy.
Image source: Getty Images.
Precision Technologies (PT) generates 35% of sales and manufactures products that help engineers develop new electrical and electronic products. Key customers read like the who’s who of large industrial companies, including GE, Siemens, Apple, Samsung, and Lockheed Martin. Management sees an opportunity for growth in its customers developing Internet of Things (IoT) and automation solutions. Finally, advanced healthcare (AHS) solutions help hospitals provide healthcare. The largest business is the infection prevention business ASP.
Fortive has a strong tailwind behind it. The business collection CEO Jim Lico has built over the years generates 58% gross profit margin and 23% profit margin while converting 18% of sales into free cash flow (FCF). Lico believes a combination of mid-single-digit revenue growth and margin expansion could result in free cash flow (FCF) of $ 1.6 billion in five years – that’s roughly 6.8% of the company’s market cap. That would be an attractive valuation, but a lot can happen in five years.
All in all, Fortive is a very attractive company – but trading at 27 times estimated earnings for 2021, it’s hard to argue that the stock is a compelling value right now.
This industrial company can’t go wrong in 2021. If it’s not a recovery in major crop prices that is driving agricultural equipment spending, it is the continued surge in the adoption of Deere’s precision farming solutions. If it’s not the housing boom that is fueling sales of Deere construction and forestry equipment, it promises to boost infrastructure spending on Deere’s road construction equipment. Deere’s core units in the US are now ready for a replacement cycle due to the advanced age of the fleet.
Image source: Getty Images.
Deere is firing at full speed right now, and Halvorsen’s investment has likely paid off. The question, however, is whether the stock is still good value now. All in all, I think the answer is yes. Crop prices continue to rise and industry momentum looks favorable given US soybean exports to China. In addition, Deere’s precision farming solutions help raise the price of Deere farm equipment and the tangible improvements they offer farmers will help keep them loyal to the iconic brand.
It’s hard to predict where crop prices will go – but assuming they stay where they are now, Deere still looks good.
As one of the three new companies that emerged from the dissolution of United Technologies, Otis is the world’s leading manufacturer of escalators and elevators. Given that China is the world’s largest end market for escalators and elevators, the country plays a huge role in Otis’ end market prospects.
The second growth opportunity comes from increasing the company’s higher-margin service sales through technology that helps it stand out from the competition. For example, Otis continues to equip its service staff with mobile devices that help identify problems and order replacement parts quickly. The use of web-enabled devices on installed Otis devices enables the company to quickly monitor and react to remote maintenance. This creates added value for customers, keeps them loyal and increases Otis ‘service revenue – and services rather than devices typically make up 80% of Otis’ bottom line.
Image source: Getty Images.
The company is enjoying the global economic recovery and in April raised its full-year sales outlook for 2021. Management now expects new device sales to grow organically by 7.5% -8.5%, compared to a previous estimate of 2% -5%, while service revenues will grow by 2% -4%. Total organic sales are now projected to grow 4 to 6% compared to a previous estimate of 2 to 4%.
Trading at 26 times 2022 earnings estimates, Otis is not a cheap stock. However, if you are optimistic about the Chinese home improvement markets in particular, Otis’s long-term growth plans will excite you.
All in all, Halvorsen seems to have made good money with Deere and Otis. Deere stock is still attractive if you think multiyear expansion in crop prices and farm equipment sales is imminent and Otis will attract Chinese bulls. Fortive is a very attractive company, but its rating suggests it is on the watchlist for the time being.
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Lee Samaha owns shares in Siemens Aktiengesellschaft. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Lockheed Martin and recommends the following options: long calls in March 2023 at $ 120 to Apple and short calls in March 2023 at $ 130 to Apple. The Motley Fool has a disclosure policy.
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