Greenlight Capital Q3 Letter: New Stakes in HPE, Tempur Sealy, Micron

David Einhorn's hedge fund firm Greenlight Capital returned 6.2% in the third quarter and is now up 3.3% year-to-date.  Their third quarter letter outlines they had average exposure of 118% long and 73% short.

At the end of Q3, Greenlight's top five positions (alphabetical order) were AerCap, Bayer, CONSOL Energy, General Motors, and gold.

New Positions in Hewlett Packard Enterprise, Tempur Sealy, Micron

The letter highlights that they established a few new positions.  First, they entered Hewlett Packard Enterprise (HPE) shares.  They see earnings of $1.40 to $1.70 over the next few years as the company recently sold its outsourced services and software businesses.  They bought at $13.29 per share.

Second, they re-entered a previous holding: Micron Technology (MU).  They feel the DRAM market has improved as have the company's earnings, though think investors are underappreciating the improvements.  They bought around $29.21.

Thirdly, Einhorn's firm entered Tempur Sealy (TPX).  We posted Einhorn's presentation on Tempur Sealy from the GIBI Dallas Conference recently as well.

Other interesting notes: they covered their short of Best Buy (BBY), closed their longs in PVH and Axiare Patrimonio.

Embedded below is Greenlight Capital's Q3 letter:



Credit to ValueWalk who posted it first.

For more hedge fund letters, we also posted up Third Point's Q3 letter here.

What We're Reading ~ 9/20/17

You need to do what others don't [Ian Cassel]

The case for stock buybacks [Harvard Business Review]

5 common mental errors that sway your decision making [James Clear]

Why is value investing so difficult? [Behavioural Investment]

Best Buy's secrets for thriving in the Amazon age [NYTimes]

Why augmented reality is about to take over your world [Buzzfeed]

What's the true total addressable market of search? [Value Venture]

Google Travel is worth $100 billion - even more than Priceline [Skift]

Profile of JD.com's founder [FT]

'Netflix for theaters' sending industry into a frenzy [NYPost]

When will self-driving cars make conventional cars worthless? [Quartz]

Why listen to earnings calls when artificial intelligence can do it better? [Institutional Investor]

The big data breach at Equifax has alarming implications [The Economist]

How Casper wants to sell you sleep [Wired]

What We're Reading ~ 11/30/16

Warren Buffett's meeting with University of Maryland students [UMD]

Is the next financial crisis on its way? [Steve Eisman]

A write-up on the impending Hilton (HLT) spinoff [Clark Street Value]

CBRE (CBG): industry deep dive to detect an emerging moat [Punch Card]

A look at Discovery Communications (DISCA/K) [Contrarian Edge]

Sustainable sources of competitive advantage [Collaborative Fund]

Why deep learning matters and what's next for AI [Algorithmia]

The unexpected genius of Facebook's Mark Zuckerberg [Fortune]

Google's online travel adventure upsets its biggest advertisers [Bloomberg]

A billionaire's dreams of creating a guns empire [NYMag]

If oil refiners crash, so will the economy [WSJ]

Mastercard, Visa set to reap spoils of India's war on cash [Bloomberg]

How Best Buy (BBY) fought Amazon [WSJ]

The evolution of media & entertainment: conversation with CEOs [YouTube]

How to get comfortable with being umcomfortable [Inc]

Why gut feelings may really help you make risky decisions [Washington Post]

Why stoicism is one of the best mind-hacks ever devised [Aeon]

What We're Reading ~ Analytical Links 12/18/13

Six investment errors you are making right now [Bloomberg]

Barclay's 2014 stock picks in each sector [StreetInsider]

Lakewood Capital on Opko Health: the placebo effect [Seeking Alpha]

Samsung: uneasy in the lead [NYTimes]

Underdog against Amazon, Best Buy charges ahead [NYTimes]

BlackRock 2014 outlook [BlackRock]

Want to invest like Buffett?  Here's how [Marketwatch]

A look at the Anadarko / Tronox situation [Distressed Debt Investing]

8 money managers share their top picks for next year [Bloomberg]

Sell Icahn Enterprises [Barrons]

They hate the Fed [Roger Lowenstein]

How to use the media to sell a company [Buzzfeed]

50 unfortunate truths about investing [Business Insider]

Where to find the biggest ideas for your business [Forbes]

The habits of the world's smartest people [Entrepreneur]

Why a for-profit college set up a man with a fake job (on purpose) [Huffington Post]

A video explaining Bitcoin [AVC]

What We're Reading ~ Analytical Links 3/20/13

What matters more in decisions: analysis or process? [Farnam Street]

The stock market and the economy are two very different animals [Abnormal Returns]

One of the most sentiment-driven rallies ever [Reformed Broker]

A pitch on retailer Coach (COH) [Old School Value]

Walt Disney (DIS): Can ESPN sustain its fee subscriber growth? [Trefis]

A small investors' guide to activist investing [Fool]

When will interest rates rise? [LearnBonds]

Technical tools for helping to identify possible market tops and bottoms [Chris Perruna]

Confirmation bias and the importance of asking "why might I be wrong?" [Incblot]

Why Redfin, Zillow (Z) and Trulia (TRLA) haven't killed off real estate brokers [BW]

This is the future of TV [Quartz]

Is it time to short Canada? [Bonddad]

How to beat Amazon (AMZN), Best Buy (BBY) edition [WSJ]

The scariest statistic about the newspaper business today [The Atlantic]

Short sellers flee the scene [WSJ]

10 signs stocks are about to tumble [Marketwatch]

Should investors be on Twitter? [Felix Salmon]

March madness analytics: blind bracket tool [WSJ]

What We're Reading ~ Analytical Links 2/27/13

2013 comprehensive review of the best online brokerages [StockBrokers]

Vodafone's (VOD) European troubles: bad news = good news? [MicroFundy]

Investing: rules of the game [Dasan]

On buying near 52-week lows or 52-week highs [World Beta]

You're not as good an investor as you think you are [WSJ]

What Barnes & Noble (BKS) retail arm might be worth [NYTimes]

Mastercard (MA) aims at mobile payment market [Yahoo Finance]

Best Buy (BBY) takeover attempt by founder in jeopardy [Reuters]

Leveraged loan market on fire [SoberLook]

USA Mobility (USMO): Cheap, but for how long? [Barel Karsan]

The new MLP landscape [Barrons]

How to find the next Michael Kors (KORS) [The Street]

Loyalty programs, share buybacks drive Safeway (SWY) [Bizjournals]

Reed Hastings on the future of Netflix (NFLX) [GQ]

3-D printing is on the fast track [NYTimes]

Why medical bills are killing us [Time]

David Einhorn Sells Best Buy & Dell, Buys Cigna & Coventry Health: Q2 Letter

David Einhorn's Greenlight Capital is out with their Q2 2012 investor letter and Dealbreaker has it posted.  In it, they reveal that they no longer own Best Buy (BBY) or Dell (DELL).  Additionally, they started new stakes in Cigna (CI) and Coventry Health Care (CVH), playing the managed care sector.  Here are some excerpts from the letter:

On Best Buy:  "We thought that the core debate was whether or  not the company could compete with Amazon.  The answer at this point is that maybe it can and maybe it can’t.  (Despite the consensus view, our store surveys have repeatedly shown  that there is no price benefit for consumers to browse at BBY and then purchase at Amazon.)   There has been some deterioration in BBY’s domestic performance, which we attribute to a  lack of a “must have” consumer electronics  product, rather than  an erosion of BBY’s  competitive position.  While we held the shares, three unexpected problems emerged:  First,  BBY depleted $1.3 billion of its cash resources by paying a double-digit multiple for  Carphone Warehouse’s share of the Best Buy Mobile profit stream.  The market promptly revalued those earnings to BBY’s mid-single digit multiple.  Second, in the most recent quarter,  BBY’s international profits collapsed.  In particular, comparable sales in its Chinese business  fell 28% as the Chinese economy appears to have hit a wall.  Finally, the company dismissed  its CEO over his personal conduct, and also removed the Chairman for failing to respond  properly to the CEO’s misbehavior.  As a result, the company has an interim CEO and is  trying to come up with a strategy.  We worried  that this could lead to additional business  disruption so we exited with a loss."


On Dell:  "We had thought that the growth in the non-PC business would be enough to
offset the deterioration in the PC business.  The non-PC growth was smaller than we’d hoped
and the PC deterioration was worse than we’d anticipated.  While DELL has a good balance
sheet, it appears likely that management will try to use much of the cash to try to buy its way
into better businesses.  At a minimum, this will erode some of the value cushion that the cash
balance creates."


On Cigna:  "CI is a managed care company with three primary divisions:  Cigna HealthCare, Cigna Group  Disability and Life, and Cigna International.  Cigna HealthCare, which comprises about 70%  of CI’s profits, offers medium and large companies traditional risk-based insurance, in  addition to administering plans for those that prefer to self-insure.  Cigna HealthCare recently  bought HealthSpring to enter the fast-growing Medicare Advantage market.  Cigna Group  Disability and Life is a low-growth, stable  business. Cigna International, which provides  insurance policies for individuals, as well as insurance and administrative services for multinational companies and governments, is growing at more than 20% per year.  We believe that  CI deserves a higher multiple because the plan administration business is a service business  that doesn’t take risk, and the other divisions do not warrant discounted values.  Our purchase  price of $45.42 per share valued CI at less than 8x estimated 2012 EPS and approximately 6x  our forecast of post Obamacare 2014 EPS.  CI shares closed the quarter at $44.00 each."  Note: CI has since fallen further and you can currently buy it at cheaper prices than Greenlight.


On Coventry:  "CVH is a regional managed care company with operations in the mid-Atlantic, Midwest and  parts of the South.  The company offers commercial risk-based insurance and has an  expanding business in the government-sponsored Medicaid and Medicare programs.   Problems with a recently-acquired three-year contract to provide managed care services to the  Medicaid population in Kentucky caused the company to  significantly reduce earnings  guidance for 2012.  This led to a large drop in the stock price.  We believe the issues related  to the Kentucky contract are manageable and finite, and CVH will return to breakeven or a  profit on this contract in 2013 from a loss this year.  Our average purchase price of $31.22  represents 8x our forecast  for 2014 earnings net of $6 per share of cash and reflects our  estimate of the negative impact of Obamacare.  CVH closed the quarter at $31.79 per share."

We've also recently highlighted some of Einhorn's thoughts on Apple, Green Mountain and Amazon.

Einhorn's top five largest long positions at the end of the quarter (in alphabetical position) were: Apple (AAPL), General Motors (GM), gold, Marvell Technology (MRVL), and Seagate Technology (STX).  We highlighted how Greenlight was adding to their STX position last month.

Instead of waiting for a copy of the letter, we'll send you over to Dealbreaker who already has it posted here.

Is Gamestop (GME) a Value Play or Value Trap? Quick Pitch

Market Folly has been adding a bunch of new features as of late. We started off with our stock of the week series and now we're going to begin a monthly 'quick pitch' on certain equities that hedge funds have been long or short.

Today's quick pitch focuses on Gamestop (GME): Value Play or Value Trap? The following is from Chris Lau, a SeekingAlpha contributor:

A major shake-up in the way games are distributed is unfolding. Activision (ATVI) and EA’s (EA) entrance in digital gaming is proving to be a winning strategy. EA’s online site, Origin, bypasses traditional sales channels. In the social networking space, Zynga’s (ZNGA) IPO showed investor willingness to take risks. Investors are putting money in the yet-to-be proven model of social networking games.

This leaves one major question: What does this mean for retailers like GameStop?


Hedge Fund Ownership (Or Lack Thereof)

The top holders of GME stock are largely vanilla mutual fund players like Vanguard and Fidelity. While Cliff Assness' quant firm AQR Capital owned a decently sized position as of 2011 year-end, there is practically no major hedge fund ownership in this stock (at least in the top 100 holders).


GameStop Backstory

GameStop has grown throughout the years, and especially after its acquisition of Electronic Boutique in 2005 for $1.44B. In the last few years as the digital downloading of games has proliferated, GameStop touted its knowledge of gaming and its consumers as a competitive advantage.

In recent months, investor pessimism has grown. Shares are 22.91% off from 52-week highs, closing recently at $21.70. The main concern lies in the rising shift to digital gaming from the traditional physical console games.

GameStop has tried to attack this shift head-on and saw over $450 million in digital sales last year. They've mainly offered access codes in stores that allow gamers to download content at home. GME was originally spun-off from Barnes in Noble (BKS) in 2002, yet another company battling digital distribution of content.

GME's management team has set aside money for further acquisitions in digital as they have cash and no debt.


Valuation

At $21.95 per share, GME trades at a P/E of 7.63 (using 2011 EPS of $2.87 that excludes write-downs). By comparison, Best Buy (BBY) traded recently at $22.95 with a P/E of 6.30 (using 2011 EPS of $3.64).


Why the Bulls Own the Stock

Bulls point to fears over digital distribution as being overblown and argue that the digital transition will take longer to play out and won't cripple GME. They feel as though GME has a dominant market position in the industry.

Joel Greenblatt of Gotham Capital runs a Compustat screen to create a 'Value 1000' index for value investors. GME is one of the main companies on that list due to its cheap valuation. Other bulls might point to a cap structure strategy and its cashflow story as compelling reasons to own it. The massive repurchases could potentially place a floor on the stock that can keep shares buoyant even if things take a turn for the worse. And given the high short interest, there's also potential for various short squeezes as these buybacks reduce the float size.

- During the last quarter, GME grew market share to record levels.
- Its expertise allowed the company to create new business models to fill profitability gap
- PowerUp Rewards program (launched October 2010) now has over 17 million members
- Pre-owned digital and mobile business will add $800 million in revenue in 2012
- The company is debt-free
- $500 million stock buyback
- Cheap valuation
- Continued partnerships with publishers to sell DLC


Why the Bears Are Short

Bears will argue that a secular shift to digital distribution of games and the rise of social gaming will lead to the demise of GME ala Blockbuster.

Hedge fund manager Jim Chanos of Kynikos Associates is a notable bear on GME shares as he argues that game publishers like EA are increasingly becoming direct competitors with GME. You can view his bearish presentation on GME here.

He argues that GME looks cheap and will appear cheap all the way down. Just like movies and music, Chanos says that the value of their brick and mortar presence will collapse. GME's counterpart in the UK, Game Group, recently filed for protection from creditors.

And while GME currently thrives on used game sales, that revenue stream could be in jeopardy in the future. It's been rumored that future iterations of Microsoft's Xbox and Sony's Playstation will likely have some sort of "anti-used games measures" built in to the consoles.

One risk that short sellers are cognizant of is that GME could potentially take themselves private or be taken over by private equity. Additionally, the cost to borrow is quite expensive due to the crowded short.

- Fewer packaged game titles are being released
- Short interest has climbed to 41%
- In its recent quarter, GME said physical console category declined faster than projected
- Comparable store sales dropped 3.6% in the last quarter
- 20% decline in hardware sales


Further Talking Points

During the company's recent quarterly conference call, management said that digital receipts are ahead of schedule. They have a goal of $1.5b receipts by 2014.

GameStop's recommerce (buy-sell-trade) for mobile devices, electronics, and tablets started in 2011. The company believes it can resell items like Apple iPads, assuming 5% trade-ins annually and a 12-18 month upgrade cycle. Sales would account for $200m by 2012 and $600m by 2014 which you can read about here.

GME forecasts growth that is reliant on physical games, hardware, and software. The short-term problem for the company is that a lack of new consoles in 2012 will pressure margins. GME's loyalty program must attract a higher proportion of digital sales.

Hot titles like Grand Theft Auto, FIFA Soccer, Call of Duty, and Max Payne 3 may be a catalyst for higher growth. These catalysts aren't necessarily reflected in the current share price and management kept only a conservative forecast for these releases.


Conclusion

GameStop (GME) is a company that dominates in its traditional space of selling physical video games, but it needs to grow-up in the digital world and faces challenges in adaptation. The negative price action in its stock as well as competitors (BBY), suggests that there is further downside. If console makers implement anti-used game measures, GME would have a tough uphill battle. Weak retail sales in electronics and heavy competition make this a stock to avoid at this time.


Thanks to Chris Lau for his contribution to Market Folly in our new 'Quick Pitch' series. If you have an investment write-up you'd like to submit, please click here to email us

Joel Greenblatt: The Big Secret For Value Investors (Presentation From Value Investing Congress)

At the Value Investing Congress today, Joel Greenblatt of hedge fund Gotham Capital gave a presentation entitled "The Big Secret For Value Investors".

Be sure to check out all of our notes from the Value Investing Congress.


Joel Greenblatt (Gotham Capital): Value Investing

He started out with a review of the concepts in his book, The Little Book That Still Beats the Market. He says you want stocks that are “cheap and good” and used the Compustat database to rank them by the two measures. Cheap: EBIT/EV. Good: EBIT/ (Net WC + Net fixed assets) (return on tangible capital).

Updated results through 2009: Decile 1: +15.2%, bottom decile: -0.2%. For 20 years ending 12/31/10: SPX annualized 9.1%, 11.8% on equal weight, “Value 1000” value-weighted index is 16.1%. Same Beta as SPX, same std dev. 1.01 Beta vs. 0.99 SPX.

Now, the current situation, and the meat of the presentation: A week ago, the Russell 1000 had average FCF of 9.2% (in the 94th percentile toward cheap!) Looking backwards, cheaper than 94% of periods over the last 20 years and that correlates with a 15-20% return over next one year (market up 5% over week since slide finished) "on only 10-15% left, but still pretty nice."

Average FCF of Value 1000 a week ago was 13.7% and was cheaper than 93% of the last 20 years, which correlates with a year forward return of 30-35% for value index. Greenblatt said that "Not only is the market cheap, but the value stocks are even cheaper."

Large cap long/short portfolio is in the 82% percentile- very big spread between long and short opportunity. ROIC long 59.4%, shorts 4.8%. Arguments against stocks being cheap (playing devils advocate): one argument is that we are at peak operating margins, but he showed a graph that indicated it is unclear what the real mean operating margins should be. The second argument is return on tangible capital continues to climb. In addition, outsourcing of factories, moving to a service economy, so tangible capital may not be the right way to look at it, and again it's unclear where the mean level is. He also showed a graph of tangible capital per dollar in sales is declining to 35 cents from 50 cents, 20 years ago.

Some of companies currently in the value 1000: Gamestop (GME), Aeropostale (ARO) ~ (Revolting companies, you’d never want to buy, he joked), Hewlett Packard (HPQ) ~ terrible, but selling at 5x eps, Dell (DELL), Microsoft (MSFT), General Dynamics (GD), Wells Fargo (WFC), and Merck (MRK). For every name, he mentioned why they are terrible, only half-joking. Part of the reason this works is “it’s really hard to buy these companies.”

He says that the current fixation on short-term returns causes managers to avoid buying cheap companies, because they need the ones that are doing well right now. Buying these stocks with very low expectations gives you a chance for asymmetric returns on the upside if they do even a little bit better than expected. He expects this “time arbitrage” will continue to be exploitable. He is very optimistic for the next year.


Q&A Session:

1. Role of dividends? He's indifferent in his strategy.

2. How does he incorporate financials now, he used to exclude them? He now ranks the financials separately, and adds to index if they are cheap, but he didn’t give what metrics he used.

3. Question about Michael Burry. (Background: In “The Big Short”, writer Michael Lewis made Greenblatt out for a villain for taking money from Burry even as Burry was right.) Greenblatt was a little annoyed by the question: “Michael Lewis has never let the facts get in a way of a good story. What they got wrong in the book is Burry wanted to side pocket both mortgage and corporate CDS... we did not want him to side pocket the liquid corporate CDSs … only reason we took money from him was we were getting redemptions.”

4. Where does he see the market now? He’s not a market timer, but he would argue for raising exposure to stocks now if asked.

5. Can you use the value screen and really juice returns by using further fundamental analysis? Answer: we were small, had 6-8 concentrated names, that’s why we made 40% returns - it’s impossible on large amounts of money or a very diversified portfolio. This solution is good for a very diversified portfolio, same beta as the market and beats the SPX. We’ve tried, but haven’t been able to beat the indexed approach. “We’re pretty good at picking stocks, so it’s hard to do.”

6. Large cap stocks are pretty cheap, this is an interesting time- HPQ at 5 times earnings. Bond bubble, even bigger than the stock bubble- which is crazy. Still plenty of opportunity in special situations for smaller funds.


About Joel Greenblatt: He manages Gotham Capital and saw 40% annualized returns for 20 years. He's the author of the new book The Big Secret for the Small Investor: A New Route to Long-Term Investment Success. And for aspiring investors, numerous prominent hedge fund managers such as Seth Klarman have recommended Greenblatt's other book: You Can Be a Stock Market Genius.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

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David Einhorn Covers Some Shorts, Buys Yahoo & Best Buy

David Einhorn's hedge fund Greenlight Capital struggled last quarter, returning -2.5%. Their short positions caused a drag on performance and as a result they've covered some of their lower conviction names.

This isn't the first time we've seen a hedge fund do this in recent memory as Whitney Tilson's T2 Partners recently covered shorts that were noticeably affecting performance. In this market, the cost of hedging is high.

Greenlight writes, "We are in a particularly difficult environment for shorting stocks. In response, we have reviewed many of the names in our short portfolio. We covered more than a dozen lower confidence shorts during the quarter. We exited four successful shorts in the for-profit education industry, two foreign bank shorts (one at a small gain, the other at a large loss), a domestic bank short (at a loss), and a technology short (also at a loss). We also covered several others where performance exceeded our expectations. We kept our highest conviction older ideas (including MCO and St. Joe) and our highest conviction newer ideas (including the energy-technology stocks described above)."

New Positions

The second most noticeable development in Greenlight's portfolio is their addition of three new positions.

Best Buy (BBY): Einhorn's hedge fund sees opportunity in the company's Mobile concept, international stores and higher-margin services. Greenlight built their position at $33.33 and shares now trade around $31.40, so this is yet another rare chance to enter a stock around the same price a major hedge fund paid.

Yahoo (YHOO): Many investors have pitched Yahoo as a value play in recent memory and Greenlight obviously sees value here as well, establishing a position at $16.93 per share (the stock trades around $17.80 now). Greenlight likes the company's net cash position and point to Yahoo's 40% stake in Alibaba Group as a valuable asset.

Delphi Automotive: They also acquired a stake in the not-yet-publicly-traded automotive supplier Dephi. This is a hedge fund favorite that has gone through the bankruptcy process and recently morphed into a one-class ownership structure. There's speculation that the company will potentially go public.

We've also detailed some of Greenlight's other positions they added earlier this year.

Top Positions

Rounding out the quarter, Greenlight Capital's largest positions in alphabetical order were:

- Arkema (France: AKE or ARKAY on pink sheets)
- Delta Lloyd
- gold
- Pfizer (PFE)
- Vodafone (VOD)

The most noticeable quarter-over-quarter change here is that Ensco is no longer one of their top holdings. We'll have to wait for their 13F disclosure to see if they merely reduced the position, sold completely out of it, or if other names appreciated more in their portfolio.

Embedded below is Greenlight's first quarter letter in its entirety (email readers come to the site to read it:



To learn to invest like this manager, be sure to check out Einhorn's recommended reading list.

Analysts' Best Stock Picks For 2010

Raymond James' global research is out with a list of their analysts' best stock picks for 2010. Our previous post on this list was taken down due to the list not being distributed to the public yet. So, now that it is available publicly, here is their list. Their picks from this past year (2009) was up 52% compared to an S&P return over the same period of 30.1%, so they've outperformed by a wide margin. In fact, their annual list of stock picks has outperformed the S&P 500 in all year but one since 1996.



Their goal is to identify stocks that will produce "above-average price appreciation" over the course of the next year. They certainly did that with their 2009 list and so let's see if they can do it again with their impending 2010 selections.

Investment theme and stock pick lists for 2010 seem to be popular amongst the various financial institutions right now heading into the new year. Just yesterday, we covered the top ten investment themes for 2010 and how to play them. We've also detailed the top ten stocks held by hedge funds as well. Today we drill it down to specific stock picks for the new year courtesy of Raymond James. As always, take everything with a grain of salt as these reflect their own opinions. Without further ado, here's the list:


Analysts' Best Picks for 2010

1. Aflac (AFL)
2. Alpha Natural Resources (ANR)
3. Altera Corporation (ALTR)
4. Bank of America (BAC)
5. Best Buy (BBY)
6. Chevron (CVX)
7. Concho Resources (CXO)
8. CVS Caremark (CVS)
9. FLIR Systems (FLIR)
10. National Oilwell Varco (NOV)
11. Nuance Communications (NUAN)
12. Sybase (SY)
13. TD Ameritrade (AMTD)
    

Let's dive into some specifics regarding each of their picks:

Aflac (AFL): Raymond James likes Aflac because they feel there is room for growth from supplemental health insurance products. Additionally, they fancy AFL's entrance into the group market. Overall, they feel they will see continued long-term demand. Finally, RJ writes, "Our price target of $60, established on October 29, assumes a normalized P/E on our 2010 EPS expectation of 11.7x less expected investment losses of $2.35 per share. The normalized P/E target is a 20% discount to the then current S&P 500 P/E of 15.6x based on a mean 2010 EPS estimate of $71.17."

Alpha Natural Resources (ANR): Their pick here is based on valuation as well as leverage to the metallurgical coal market, an area that is strengthening. They are also well diversified in other areas and have a solid balance sheet. RJ's main thesis here is valuation based as they write, "Our $52.00 target price factors in our target multiples on the various metrics including 15x P/E ratio, 7.5x P/CF, and 7x EBITDA, which fit within the historical trading ranges of ANR, along with a long-term DCF analysis. Note that this does not include any value for the ~330 Bcf of natural gas reserves, which we believe is easily worth another $5.00 per share, with upside over time through its Marcellus acreage."

Altera (ALTR): Raymond James has selected Altera due to their positioning to capitalize on programmable logic devices (PLDs). They think ALTR will outpace the semiconductor industry in growth by 2x over the course of the next few years. Their analysts write, "ALTR shares remain one of our favorite ideas with a 12-month price target of $29, based on a 23x target P/E multiple to our 2011 EPS estimate of $1.25. This multiple is a slight premium to the shares' 21x historic P/E average over the last three years, which we believe is conservative given Altera's solid business model and leadership in the industry."

Bank of America (BAC): Their tagline on this stock is simply "superior upside potential." As we have covered previously, numerous hedge funds agree as BAC is one of the most popular stocks amongst hedge funds. Analysts at Raymond James feel an oligopoly has emerged in US banking and BAC is right up there with the best in risk-based pricing as they write, "Trading at only 69% of book value and 131% of tangible book value compared to the recent industry averages of 114% and 164%, respectively, shares of BAC offer attractive risk/reward pricing and compare favorably to large-cap peers. Bank of America has already received approval to pay back its $45 billion in TARP funds and we believe a CEO announcement is imminent, both of which should receive a favorable response from the Street."

Best Buy (BBY): RJ's analytical team feels Best Buy can continue to capitalize on the demise of Circuit City as they will continue to gobble up market share, expanding returns. Improving operating margins and an increasing consumer base is boosting BBY's performance and they feel management is one of the best in consumer electronics. RJ writes, "Our $52 price target was reached by placing a ~15x multiple on our FY11 EPS estimate of $3.45, which represents a 16.7% discount to its historical three-year average of 18x."

Chevron (CVX): Chevron is the 'best positioned' among the integrated oil plays, RJ says. This is due to their above average oil focus, their drill-bit track record as they have the highest resource replacement rate, and lastly their small refining segment which should benefit them as they feel those with large exposure to refining will suffer going forward. Raymond James' analysts write, "Quite simply, we believe Chevron should be a core long-term holding for energy investors. Our $92.00 target price is based on ~11.6x our 2010 EPS estimate of $7.92, a slight discount to the mean 2000-2009 P/E. Inclusive of the current 3.5% dividend yield, our target price implies total return potential of 18%."

Concho Resources (CXO): Their pick here is mainly due to high returns in the Permian Basin as the vast majority of their revenues are tied to the price of oil. Of CXO, RJ's analysts say, "Concho generates some of the highest cash margins in our E&P group. One of the company’s core plays, the Yeso, generates an 80% internal rate of return at $70/Bbl oil. Concho is also one of the best in the entire E&P universe on production growth per debt-adjusted share (~35% vs. 3% for the peer group)."

CVS Caremark (CVS): This selection is based on the fact that CVS's model is not broken and that valuation is still attractive. They argue that the worst is behind this name and that going forward retail tailwinds will be behind them and they will see improvements in their Long's acquisition. Raymond James analysts argue that CVS now has compelling relative valuation and that you could potentially be getting their PBM essentially for free. They write, "With expectations reset, the potential for an improved 2011 selling season, and continued share gains in retail, we believe shares are poised to expand off of these trough valuation levels, especially if management continues to deploy significant levels of FCF to share repurchases. Our $39 price target represents 13x 2011 EPS of $2.95, toward the low end of historic ranges." Back on November 5th on our Twitter account we actually mentioned that Lee Ainslie (hedge fund manager of Maverick Capital) was supposedly very keen on shares of CVS at an investment conference that took place before the recent disappointment. We'll have to see if he still favors it going forward.

FLIR Systems (FLIR): Their bullishness on FLIR is attributed to rising orders and what they deem to be attractive valuation. FLIR is a pure play on thermal imaging and infrared technology, an area with lots of growth potential. They write, "As time progresses through next year and investors value FLIR on 2011 earnings, we believe the stock can reach the $40.00 range as its multiple expands toward the historical average. Our $35.00 target price is a 23x multiple on our 2010 EPS estimate of $1.50, in-line with the firm’s historical average multiple and in-line with peers."

National Oilwell Varco (NOV): This has previously been a hedge fund favorite and now Raymond James feel it will benefit throughout 2010. Their rationale: compelling valuation, free cash flow that is strong, and inorganic growth opportunities. They simply feel this is the best name in the oil service space by writing, "Our target price of $60.00 is based on ~18.5x our 2010 EPS. This valuation is in-line with its oilfield manufacturing peers and represents a more reasonable valuation for the company given its tremendous cash position, decent yield, and excellent growth prospects."

Nuance Communications (NUAN): Raymond James feels that speech recognition will be a forcible trend in technology and that Nuance is how you can play it. NUAN is already well positioned in a market that is just now entering the mainstream. Their analysts feel that, "Catalysts for the stock could include: gradual improvement in on-premise enterprise sales and resurgence in enterprise speech growth rates to 10+%, continued large on-demand wins within healthcare, potential benefits from the healthcare stimulus for Dragon Medical, continued new handset and auto wins for mobile, large hosted mobile care wins, and strong cash flow generation."

Sybase (SY): Their analytical team has decided that Sybase actually makes sense in any market environment. However, they have picked it for their 2010 list because it is a recession-resilient business and that they can capitalize on secular growth. RJ says, "Our $49 price target is based on a forward P/E multiple of 19x our 2010 EPS estimate of $2.58. We believe this is justified due to continued license growth, an improving operating margin, and the belief that we will continue to increase our EPS estimates."

TD Ameritrade (AMTD): Rounding out their list of selections, TD Ameritrade makes the cut due to possible catalysts, a solid balance sheet, as well as possible earnings growth should the Fed raise rates during the next year. RJ's analysts write, "TD Ameritrade remains at a discount to peer Charles Schwab (SCHW/$17.88/Outperform), which is currently trading at 21x our 2010 EPS estimate of $0.84 and 14x our 2011 EPS estimate of $1.29."

So there you have it. A few peculiar insertions but some logical ones as well. We'll have to see if their list can outperform the S&P500 yet again this coming year. We've also covered some other research out of Raymond James as we detail their chief investment strategist Jeff Saut's weekly market commentary. You can check out his stock market commentary from this week, as well as his previous market commentary where he feels a weak dollar will drive further market upside.

Comparing their list to the top stocks held by hedge funds, we see very little overlap. However, one stock where they both resoundingly agree is Bank of America (BAC). Tons of hedge funds hold this name and Raymond James has labeled it one of their top picks. For more favored stock picks for the year 2010, check out the top ten investment themes for 2010 as well as the most popular stocks among hedge funds.

Analysts' Best Stock Picks For 2010

*Update: This post has been removed per the request of representatives from Raymond James. Our apologies for any inconvenience. In the mean time, we highly recommend checking out the top ten investment themes for 2010 as well as the most popular stocks owned by hedge funds.

If you wanted more research out of Raymond James, we've also detailed their chief investment strategist Jeff Saut's weekly market commentary. You can check out his stock market commentary from this week, as well as his previous market commentary where he feels a weak dollar will drive further market upside.