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Invest in Venture Capital's 5 Favorite Stocks - views
BALTIMORE (Stockpickr) -- Normally, the words "venture capital" conjure up thoughts of closed-door deals in private equity that retail investors can't touch. But it ain't necessarily so. In fact, venture capital firms own more publicly traded stocks than you might think -- more than $53 billion of it in fact, in the last quarter.
When a venture capital firm buys up a position in a publicly-traded firm, it says a lot. After all, VCs have access to private investments that retail investors can only dream of. They're constantly pitched by the best and brightest entrepreneurs around the world, so the decision to buy stocks comes with one obvious conclusion: It's offering the best risk/reward tradeoff right now.
If venture capital professionals are making big bets in public equity, investors had better pay attention. That's why we're taking a look at VCs' 5 favorite stocks today.
To do that, we're focusing on 13F filings. Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F.
In total, approximately 3,400 firms file 13F forms each quarter, and by comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around. While the data is generally delayed by about a quarter, that's not necessarily a bad thing. Research shows that applying a lag to institutional holdings can generate positive alpha in some cases. That's all the more reason to crack open the moves being made with institutions' $16.3 trillion under management.
Today, we'll focus on five venture capital favorites from the last quarter.
Norwegian Cruise Line
2013 has brought smooth sailing for shareholders of Norwegian Cruise Line (NCLH), the $6 billion Miami-based operator of leisure cruises. Norwegian Cruise Line started in 1966 offering discount Caribbean cruises to travelers with a single ship. Today, the firm's fleet includes 12 purpose built ships -- the most recent being the 4,000-passenger Norwegian Breakaway delivered two months ago.
As travel spending enjoys an upswing in 2013, so too are shares; NCLH has rallied more than 23% since the start of the year.
Norwegian's claim to fame is its "freestyle cruising" philosophy, which centers around letting guests dine and enjoy activities without a set schedule. While that concept has migrated to other cruise lines in the last decade, Norwegian owns the tagline and it owns the mindshare. NCL has enjoyed material revenue growth every year since 2009, boosting top line by more than 22% over that period. That trajectory isn't likely to slow.
Obviously, the cruise business is capital intense -- extremely capital intense. That's hindered Norwegian's profitability in recent quarters, particularly as it's spent considerable amounts of money on upgrading its fleet. That said, the firm's total debt is just shy of $3 billion, hardly a mind-blowing amount of leverage given Norwegian's scale. VC firms picked up 66 million shares of NCLH in the latest quarter, picking up a $2 billion stake in the firm.
$7.3 billion real estate firm Realogy Holdings (RLGY) has been seeing some market-beating price action itself in 2013. The real estate franchisor is effectively a long bet on U.S. housing -- after all, it owns some of the most well known real estate brokerage brands in the country, including Century 21, Coldwell Banker, ERA and Sotheby's International Realty. Those franchised brokerages give Realogy an attractive licensing income, and its relocation and title service units add a complementary revenue centers to it all.
Realogy's scale is massive. With more than 13,600 offices and 239,000 agents worldwide, the firm can move more properties than its smaller rivals could dream of. It also bridges the pricing spectrum, with higher-end brokerage names like Sotheby's supplementing its conventional brands. Better, its franchisor model means that its overhead is extremely low. That helps RLGY handle any economic hiccups in the future where deal volume is subdued.
While RLGY's collection of businesses are attractive, its execution has been less attractive because of the high acquisition costs for its portfolio. Profitability has escaped the firm for the last several years, and even though the firm's balance sheet is healthy, it's not capable of hemorrhaging cash indefinitely. VC investors picked up 20.4 million shares of RLGY in the last quarter, but I'd be hesitant to recommend the same until the firm can actually book a profit.
Berry Plastics Group
Consumer packaging maker Berry Plastics Group (BERY) has been benefitting from a surge in consumer stocks this year -- it's rallied more than 39% in 2013, stomping the S&P 500 outright. So the question now is whether that growth has been warranted.
For their part, venture capitalists think so: VCs bought 1.23 million shares of BERY in the latest quarter, hiking their position to $1.3 billion in market value.
Berry's products are everywhere, you just might not realize it. The firm's customers include some of the most popular food and household products brands, with more than 13,000 product manufacturers turning to Berry's packaging expertise in all. That hefty customer Rolodex is hugely beneficial for the firm. Since packaging involves high integration costs with factory lines, switching costs are high for customers thinking about turning to a rival.
At the same time, a big repository of customers gives Berry an opportunity to cross sell its packaging solutions across product lines that haven't been tapped yet. Novel packaging solutions can create opportunities where there aren't any. Berry's margins are paper thin, but they're positive. At the same time, the firm's balance sheet is adequate even if it's not exactly a fortress. Berry has focused on growth over generating deep value for the last few quarters, and that's good enough to warrant hefty buying from VCs and retail investors alike.
If you're looking for a unconventional consumer play, Berry is worth a second look.
There isn't that much that stands out about New England-based bank Webster Financial (WBS) -- but that's exactly what investors should like about it.
Webster is a mid-cap bank holding company that provides a conventional suite of financial services to its customers; its offerings include commercial and retail banking, mortgages and an investment and wealth management business. Regional banks such as Webster gained a lot of ground in the wake of the Great Recession. Because they actually focused on banking in the fat years, they were able to keep their doors open in the lean years thanks to higher underwriting standards than their bigger peers maintained.
Because of Webster's small size and attractive positioning in the lucrative New England market, the bank could become an attractive acquisition target for bigger regional banks looking to get exposure to wealthy depositors. The firm's straightforward loan book only amplifies its value as a potential tuck-in acquisition. With a strong balance sheet and increasing fee-based revenues from its wealth management arm, Webster is well positioned to tackle 2013.
Venture capital and private equity firms have been picking up shares of WBS in the last quarter. All told, they added 4.56 million shares of the bank to their portfolios this year. That more than doubles VCs' stakes in the firm.
Department store chain Kohl's (KSS) is another name that's getting attention from private equity firms in 2013. In the first quarter, firms bought 334,000 shares of the value-focused retail chain, picking up a $15.4 million stake in the chain.
Kohl's operates 1,150 stores spread across the U.S. But don't think that KSS is your standard department store name -- it's not by a long shot. Unlike most of its rivals, Kohl's doesn't operate high-cost mall anchor locations. Instead, its bread and butter is in standalone big box stores, locations that offer lower rents and more space for products.
In a nutshell, the firm's customer proposition centers around offering middle-income consumers well-known brand names at moderate prices. To do that, it's adopted a unique strategy: instead of courting deals from premium-priced brands, KSS has pursued exclusive celebrity and designed-backed labels for its stores, moves that have dramatically boosted KSS' margins and customer draw. Today, around half of Kohl's sales come from its own private label brands. That hefty private label penetration is an advantage that few other stores can compete with; it means that customers come to Kohl's because they can't find its offerings anywhere else.
With a balance sheet that's flush with cash and plenty of untapped room for new store locations in the U.S., Kohl's is well positioned for growth. It makes sense to bet alongside the VCs on this one.
To see these stocks in action, check out the Summer 2013 Venture Capital Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.