Paul Tudor Jones was born in Memphis, Tennessee, and went to college there before attending Memphis University School for high school. He then moved on to University of Virginia, where he obtained an undergraduate degree in economics in 1976 and a welterweight boxing championship.
In 1980, Jones set up Tudor Investment Corporation, which is nowadays a major asset management company located in Greenwich, Connecticut. The Tudor Group, which consists of Tudor Investment Corporation and its subsidiaries, is engaged in active trading, investing and research in the global equity, venture capital, debt, currency, and commodity markets. One of Jones' earliest and biggest successes was predicting Black Monday in 1987, tripling his capital during the event thanks to large short positions.
I reviewed Paul Tudor Jones' portfolio (via whalewisdom.com) and discovered that he picked some interesting stocks, like Yahoo (YHOO) and Oracle (ORCL). I will detail his holdings and the reason why I like some of his selections.
Liberty Media Int-A (LINTA)
Located in Englewood, Colorado, Liberty Interactive Corp. possesses a wide range of businesses, such as electronic retailing, online commerce companies, and interactive technology services. The company markets and sells several consumer products in the U.S. and abroad, mostly through televised shopping programs on its QVC networks and via the Internet through its domestic and international web sites. Liberty Media an e-commerce platform of diverse web sites. Liberty Interactive's online commerce sites provide service to numerous retail categories.
I like the fact that Liberty Interactive's QVC division has turned into the undisputed market ruler in the $8 billion TV home-shopping business. At present, QVC controls an expected 69% market share, far ahead of its closest rivals, HSN Inc. and ValueVision Media Inc. In addition, Liberty Interactive also has a 32% stake of HSN Inc. TV home-shopping business is defined as having a strongly solid customer base, comprising mainly women. QVC accounts for 11 million customers in the U.S., which is estimated to increase in the long term. Tudor Jones selected a leader in its segment with LINTA.
Other positive is that eCommerce business of Liberty Interactive is observing important growth year after year. For the first nine months of fiscal 2011, this segment's income grew by a massive $158 million in comparison to the prior-year period. Each of the firm's e-commerce business sites saw sales increase. Adjusted operating income before depreciation and amortization grew by $18 million in the first three quarters of 2011 like the prior-year period.
In terms of Valuation Ratios, LINTA is trading at a Price/Book of 1.7x, a Price/Sales of 1.2x and a Price/Cash Flow of 9.6x in comparison to its Industry Averages of 1.9x Book, 1.6x Sales and 10.8x Cash Flow. It is essential to analyze the current valuation of LINTA and check how is trading in relation to its peer group. The company is undervalued related to its peers, considering it has market leadership position.
Recently, Telsey Advisory Group raised its target to $23-25 from $20-22 in LINTA shares. With retail powerhouse QVC at its core (86.0% of its 2011 revenue and 95.1% of its adjusted EBITDA), it sees several catalysts for Liberty Interactive Corp's shares, including a growing proportion of online sales (more than 50.0% of 2014 revenue at its US QVC unit, versus 36.8% in 2011) and the separation of its non-core holdings into a separate tracking stock to more accurately reflect QVC's performance.
Devon Energy (DVN)
Devon Energy Corporation , located in Oklahoma City, Oklahoma, is an independent energy firm committed mainly in exploration, development and production of oil and natural gas. The company's oil and gas operations are mostly concentrated in the onshore areas of North America, as well as the United States and Canada.
DVN is quite an interesting pick from Tudor Jones. Devon Energy's deep and broaden portfolio, mainly composed of unconventional resources, shows important long-term growth potential. The firm devotes a considerable part of its capex budget to low-risk development projects in its vast North American assets, which give reliable and repeatable production and reserves incorporation.
Devon has managed to retain financial flexibility and liquidity by wisely managing its account. The company's solid performance and offshore divestiture successes during 2010 resulted in robust year-end liquidity levels. Since September 30, 2011, the company had $6.8 billion of cash and short-term investments, whereas its net debt to adjusted capitalization ratio dropped to 10%. Devon's working cash flow before balance sheet changes in the second quarter raised 6% year over year to reach $1.9 billion.
Shares of Devon are presently trading at 6.1x trailing 12-month cash flow per share, compared to the 25.7X average for the peer group and 11.8x for the S&P 500.
Recently, Devon Energy missed earnings by $0.37, while revenues rose 16.3% year/year to $2.5 bln vs the $2.77 bln consensus. Devon's first-quarter 2012 earnings were significantly affected by unusually wide Canadian oil price differentials. Following the end of the quarter, Canadian oil differentials have begun to normalize. I think Tudor Jones expects that DVN shares appreciate considering that normalization scenario.
Yahoo! Inc
The most important event around YHOO happened in May 21. The company and Alibaba Group announced they have entered into a definitive agreement for a staged and comprehensive value realization plan for Yahoo!'s stake in Alibaba. The first step is the repurchase by Alibaba of up to one-half of Yahoo!'s stake, or ~20% of Alibaba's fully-diluted shares. The purchase price will be based on a valuation of Alibaba to be established through equity financing that Alibaba intends to undertake to finance the transaction, subject to a floor valuation of approximately US$35 billion.
The agreement includes substantial financial incentives for Alibaba to raise the additional equity at a valuation higher than $35 bln. At the minimum price and assuming the initial repurchase of the full 20% stake, Yahoo! would receive from Alibaba consideration of ~$7.1 bln, composed of at least $6.3 bln in cash proceeds and up to $800 mln in newly-issued Alibaba preferred stock.
After that event happened, one of the leading Tech research houses issued a recommendation article of YHOO on which I agree. Oppenheimer analyzed that under a base-case scenario, the deal suggests a fair value for YHOO shares of $18, consistent with its target. What is important is that Openheimer considered that if YHOO is able to distribute in comparison of selling Alibaba shares post IPO, this would add another $1 upside. In a bull case scenario, if Alibaba saw asset appreciation of 20% by its IPO and YHOO is able to exit Yahoo Japan on favorable terms, this would yield a low-probability upside that would imply a valuation of $24.
Another very important development in YHOO shares is its recent change in Management. I also read a very interesting report from Stiefel financial about YHOO's new interim CEOs, Ross Levinsohn Interim CEO. Levinsohn is an extremely qualified executive, in Stiefel's view, and will serve as a calming force amid the recent management turmoil. He has a visceral understanding of what it takes to succeed in the media business. The research explained that under new leadership, Yahoo! is more likely to re-emerge as a premier, highly profitable online media company more quickly.
To sum up, the true vale in YHOO shares comes from the recent Alibaba agreement and the new CEO denomination. I think YHOO is a very compelling turnaround pick from Tudor Jones.
Timken Co (TKR)
Timken Company 's activities are divided into two principal segments. The first is anti-friction bearings and the other is steel. Timken is a leading international manufacturer of highly engineered bearings, alloy and specialty steels and components, as well as related products and services. The company also produces custom-made steel products including precision steel components for automotive and industrial customers.
I like Timken's focus in expanding its footprint in the higher-margin industrial sectors (including aerospace, wind, and heavy industry), as well as increasing its presence in Asia. Timken is willing to allocate capital to acquire market-leading positions in various industrial and aftermarket niches, as long as the opportunity would be accretive to earnings in year 1. I do not recommend this stock even is if the company's strategy is solid because I do not feel comfortable with the overall business model. Steel is a commodity and I am looking to buy brands and companies that sell products that are not subject to market prices.
I think steel stocks are not the ones I first look to buy. Steel prices and volume can be quite volatile, but I read that Timken is able to recoup input cost changes via surcharges linked to price changes of scrap steel, energy, and alloy metals that are published monthly. However, volume and prices sometimes drop. For example, Timken shipped 49% fewer tons of steel in 2009 compared with 2008, while prices fell precipitously.
Fluctuating volume can sometimes lead to low utilization rates at the company's steel mills and therefore can result in lackluster returns. In 2009, the steel mills' underutilization hurt operating earnings by $70 million compared with the prior year, resulting in an annual operating loss for the steel segment. Meanwhile, during 2011, the company's steel mills were running at capacity and placed customers on allocation. Consequently, the firm will likely increase its capacity in 2014
Different to other steel companies, Timken is financially healthy. The company ended 2011 in a net cash position. I find the debt maturity schedule to be manageable, with no maturities until 2014. Given its improving focus on return on capital, I believe the company will continue to be free cash flow positive over the course of the economic cycle.
Oracle Corp
Oracle is one of the big tech leaders I feel comfortable investing in. Oracle's long-term goal is to drive earnings growth through the sale of differentiated and high-value technologies. Oracle remains focused on expanding its margins further in the upcoming quarters, based on improving results from Sun's hardware platform. Oracle also expects gross and operating margins to benefit from the declining percentage of third party hardware (non-Sun) that it resells, going forward.
I like ORCL shares for a tactical long trade over the next 3-6 months. I think the market is currently not appreciating the strength of Oracle's core tech franchise and the seasonal strength of the business into F4Q. Since the beginning of the year, the shares have underperformed the software index by 8% and I think that trend will break as the market starts considering solid names in a highly volatile environment.
Other stocks that Tudor Jones likes
Tudor Jones initiated a new position in Becton Dickinson (BDX) and added to his position in Starbucks (SBUX) in the recent quarter.
BDX is a high quality medical stock. The company recently reported in line consensus estimate of $1.38 and revenues rose 3.6% year/year to $1.99 bln vs the $1.94 bln consensus. The most important thing is that BDX issued higher guidance for FY12 forecasting EPS of $5.68-5.73, excluding non-recurring items, vs. $5.66 Capital IQ Consensus Estimate. Similar to other of his picks, the stock has not appreciated since these recent developments.
The most important development in Starbucks is that the company entered the ready-to-drink market. SBUX opened its first retail store for Evolution Fresh and Seattle's Best Coffee and expanded its relationship with Green Mountain Coffee Roasters. Other positives were the announcement of the Verismo single-serve machine, the key strategic changes in the UK and France, and the introduction of new dessert items to be sold at retail.
I like both the SBUX and BDX picks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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