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Shadow Soros' 5 Two-Fisted Buys - views
BALTIMORE (Stockpickr) -- Hedge fund investor George Soros has been getting a lot of attention lately, chiming in conspicuously on what he thinks should be done about the eurozone debt crisis. And investors who want to skirt drama in the EU would do well to watch what Soros is buying right now.
On Saturday, Soros spoke at the Festival of Economics in Trento, Italy, where the billionaire investor now famously gave Germany three months to avert a breakup of the euro. In his speech, Soros claimed that we’re now at an inflection point in the eurozone crisis, and EU leaders (with Germany at the lead) would need to take swift, dramatic steps to save their economies -- and the financial markets.
Those are strong words from anyone who’s under the public microscope, but they’re even stronger when you consider how much skin Soros and company have in the game: his firm is effectively a $25 billion family office that has more than $5.75 billion in stock holdings at last count. So for investors looking to sidestep the drama in the EU, buying like Soros isn’t a bad idea.
Today, we’ll take a closer look at five stocks that Soros Fund Management opened new positions in over the course of the last quarter.
After all, with Soros keeping a close eye on what’s happening in the EU, it makes sense that the stocks his firm has been buying were picked to perform in spite of the black clouds over the eurozone. Soros is no stranger to holding big positions in cash, so the fact that he’s stepping out to buy positions in these names tells us something.
Without further ado, here’s a look at five of Soros’ biggest new positions for the first quarter of 2012:
While 2012 may have been a challenging year for most stocks, it’s been a banner year for investors in SunTrust Banks STI: Shares of the $11.4 billion regional bank stock have rallied around 20% since the first trading day in January. Atlanta-based SunTrust has a geographic footprint that’s focused on the Southeastern United States, with around 1,700 bank branches in its network.
Even though SunTrust built up massive exposure to Florida ahead of the financial crisis, the slightly better underwriting standards of regional banking firms spared STI from the performance at bigger banks. Still, the firm was one of the last names in its peer group to dig its way out of the crisis and return to consistent profitability, and that’s kept investors from really piling into STI, until more recently. It’s been more than a year since SunTrust repaid its TARP loans, though, and most of the skeletons seem to have been shaken out of its closet. With net margins back in the double digits, investors would do well to give this stock a second look.
I’ll be the first to say that there are other regional banking names that I like more than SunTrust. Still, as a secondary holding, I think that STI has a lot of promise fundamentally, and its momentum is impressive in 2012. Soros Fund Management bought 3.2 million shares of STI in the first quarter of this year, building a $77 million position in the firm.
Another name that Soros bought with both hands last quarter is Chevron CVX, the $190 billion oil and gas supermajor. Chevron has had less impressive performance this year, falling 9% as oil prices slid definitively below their triple-digit range. Still, Soros Fund Management acquired 682,000 shares of Chevron, building a $73 million position in the stock.
As an integrated energy company, Chevron owns everything from the oil and gas wells to the refineries to the gas station chain and petroleum product distribution channels that sell fuel and petrochemicals to their end users. That sort of vertical integration means that Chevron is able to keep a bigger piece of each dollar of revenue in-house, even if less profitable divisions (like refining) dilute the deeper margins of the E&P business. Chevron has considerable exposure to offshore drilling, one area where the company stands to find growth opportunities; at its size, those opportunities are a lot harder to come by than they once were.
Offshore production carries more risks, but that also comes with more rewards, and Chevron’s exposure to that and other “alternative” energy sources gives the firm more interesting posturing than most of its supermajor peers. Its bulletproof balance sheet and 3.73% dividend yield make it more financially attractive. It makes sense to follow Soros into this stock for energy exposure right now, even if energy prices have been struggling in the short term.
Macy’s M is another stock that’s rallied double-digits in 2012, in spite of a meager 2.2% climb in price for the S&P 500. The household-name retailer operates more than 850 stores in the U.S., under the Macy’s and Bloomingdale’s banners. The firm caught George Soros’ attention in the last quarter. His firm bought 1.45 million shares of Macy’s then, establishing a $57 million position in this new name.
Macy’s has made some big changes in the last few years, adapting to recessionary headwinds in retail by slimming down its operations and attempting to dig itself a somewhat more robust economic moat. Today Macy’s enjoys better net margins and a much-improved merchandising strategy that’s more customized to individual stores than was the company’s previous model.
The biggest assets over at Macy’s are its footprint of stores (many of them legacy locations in downtowns across the country) and its brands. Those two factors should keep consumers streaming into the firm’s stores in this economic environment. However, extremely high competition from rivals means that, if Macy’s actually wants to earn a profit for its trouble, it’ll have to focus on keeping back-office and operational costs to a minimum in the coming years. Same-store sales and margins have each been climbing since 2008 -- so clearly, Macy’s is on the right track with its efforts right now.
Tesoro TSO was Soros’ second big bet on the oil business in the first quarter. The mid-cap firm is an independent oil refiner that has the capacity to process 665,000 barrels of crude a day in its network of refineries, as well as a retail business that includes close to 1,200 gas stations. Soros purchased 1.3 million shares of the firm in the last quarter, building up a $34 million stake, or close to 1% of TSO’s outstanding shares.
Tesoro’s business is stacked in the western United States, with big exposure (and refining capacity) to states like California, Hawaii and Utah. Taking the leadership role in Western refining gives Tesoro some advantages, primarily because other refiners don’t have big exposure there compared to areas like the Gulf coast, where the majority of U.S. refining capacity is located. That geographic positioning helps TSO to capture a premium for its gasoline and petrochemical products, and integration of refining and retail helps squeeze a bit more profitability from two traditionally low-margin businesses.
Low margins are a concern for TSO. While the firm doesn’t have the risks of exploration on its balance sheet, it’s only able to skim a thin margin off of the top of any dollar that passes through its income statement. In many ways, that, and a capital-intense business, make TSO less resilient to economic headwinds than similar-sized E&P firms. Nevertheless, lower volatility in crude prices bodes well for TSO’s profitability in 2012. Investors who want an ownership stake in Tesoro’s West Coast gas business should take note.
It’s also shaping up to be a stellar year for shareholders in Salesforce.com CRM, already in 2012, this stock has rallied more than 30%. Now, Soros and his team are betting on higher ground for shares. Soros purchased 200,000 shares in the first quarter, making the newly acquired position a $30 million bet on CRM’s success.
Salesforce.com produces customer relationship management software (thus its ticker symbol), providing a must-have application for its 100,000 customers. CRM software helps businesses interact with their customer lists, enabling everything from sending newsletters to tracking sales. That mission-critical nature of Salesforce’s offering -- and the high switching costs of going with another vendor -- gives shareholders a big economic moat.
And because Salesforce.com offers up a software-as-a-service model, the firm is able to collect consistent recurring revenues that get billed each and every month without the need to keep spending mountains of money on customer acquisition. The result is stair-step revenue growth and a balance sheet that sports a deep net cash position. While profitability has been less attractive more recently, financial performance has consistently bested analyst estimates. CRM isn’t a cheap stock, but for investors looking to buy momentum and moats in 2012, this name is hard to better.
To see the rest of George Soros’ favorite stocks, check out his updated portfolio on Stockpickr. -- Written by Jonas Elmerraji in Baltimore.
Disclosure: Author holds no positions in the stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.