Maverick Capital Goes Big on Bank of America

BOSTON (TheStreet) -- Maverick Capital, the $9.4 billion hedge fund run by Lee Ainslie, initiated a big stake in Bank of America (BAC) in the fourth quarter. The firm dumped Family Dollar Stores (FDO), now the focus of a private-equity buyout.

The Maverick fund, which has a 76-stock portfolio, held 9.5 million shares of Family Dollar, a chain of self-service retail discount stores aimed at low- and middle-income consumers, at the end of the first quarter of 2010. The fund trimmed it to 2.9 million shares at the end of the third quarter and then eliminated it by year-end, according to a Securities and Exchange Commission filing.

Activist investor Nelson Peltz offered to buy Family Dollar for about $7 billion in cash this week, setting its shares on a run. Hedge fund manager John Paulson, who earned $5 billion for himself last year by betting on gold, also exited Family Dollar.

Lee Ainslie

But Maverick hasn't missed out on much. Family Dollar's shares rose 81% in 2010, so it took the cream off the top. This year they're down about 14%.

During the fourth quarter, the fund's managers also soured on upscale clothier Abercrombie & Fitch ( ANF), dropping its stake from 6.7 million shares in the previous quarter to 2.2 million at year-end.

Coincidentally, the retailer just closed out one of its strongest quarters ever, reporting a profit increase of 95% to $92.6 million. It attributed that to sharply higher international sales and a continued recovery in the U.S., when it lost market share to lower-priced teen retailers during the recession.

Among the continued biggest holdings of the fund are Marvell Technologies ( MRVL), a manufacturer of mixed-signal and digital-signal processing integrated circuit for high-speed, high-density, digital data storage and broadband digital data networking markets, at 20 million shares, and Qualcomm ( QCOM), a maker of digital wireless communications products and services based on the company's patented CDMA digital technology, at 7.1 million shares.

Big holdings in the financial services sector include JPMorgan Chase ( JPM), at 8.5 million shares, and a new holding, Huntington Bancshares ( HBAN), at 13 million shares.

Ainslie, based in Dallas, sent out his annual investors' newsletter summarizing 2010 activity within the past two weeks and in it he reported that Maverick's main fund returned 11.2% for 2010, while its Levered Fund returned 30.1%. The S&P 500 returned 15% last year.

On the following pages is a closer look at Maverick's holdings.

>>View Maverick Capital's Portfolio

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Maverick initiated a Bank of America ( BAC) stake with a huge 9.2 million share buy during the fourth quarter. That's already paying off as the shares are up 11% this year.

At year-end, Maverick's holding was worth about $123 million.

Bank of America is the largest U.S.-based financial holding company, with assets of $2.3 trillion. But it posted a net loss of $1.6 billion, or 16 cents per share, for the fourth quarter, resulting in a full-year loss of $3.6 billion, or 37 cents per share. Contributing to that was its acquisitions of Merrill Lynch and Countrywide Financial in 2008 at the peak of the market.

Maverick apparently sees Bank of America as a diamond in the rough. It has a huge deposit base and a market value of $150 billion, giving it tremendous lending power, and it is the dominant play in the country's high-growth regions of California, Florida and Texas.

Standard & Poor's rates its shares "hold," but gives the company a three-star rating based on fundamentals. It has a 12-month target price of $16, which equates to 10 times S&P's 2011 earnings per share estimate of $1.62. It projects earnings of $2.22 per share in 2012.

S&P's poll of analysts that follow the company found nine "buy" ratings, 10 "buy/holds" and 11 "holds."

For fiscal 2011, those same analysts estimate that Bank of America will earn $1.28 per share and that will grow by 46% to $1.87 in 2012.

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Maverick initiated a 1.5 million share stake in 7 Days Group Holdings ( SVN) in the fourth quarter. The company is a national budget-hotel chain based in China. It's sort of the Motel 6 of China.

China's booming economy is giving more people the time and money to travel. This company is a play on that trend as that nation's middle-class grows. The brand name is "7 Days Inn," and it aims to attract the value-conscious business and leisure traveler.

The company has a sophisticated reservations system called eCommerce that helps keep overhead low.

Zacks Investment Research, which has the shares rated "outperform," with a $23.90 price target, says there are five "strong buy" ratings from other analysts, and one "hold" on the company's shares.

It has a market valuation of $933 million. TCW Asset Management is the largest institutional shareholder, at 4.6%, followed by Maverick, at 3%, and Fidelity Contrafund, at 1.4% of shares. Institutional investors own 21% of the young company.

Its shares are down 12% this year, but gained 71% last year.

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Maverick raised its stake in a long-term holding, Corning ( GLW), by adding about 1 million shares since the end of the first quarter through year-end. That brings its total to about 19.7 million shares, or roughly $3.8 million, demonstrating a continued allegiance to the maker of glass substrates.

Corning dominates the liquid crystal display (LCD) market, which is finding new applications regularly in addition to existing relationships in the electronics industry, on TVs, computer monitors and in the fiber-optic equipment used by the telecommunications industry.

A Morningstar analyst says in a recent research note that "we expect demand for LCD displays to grow rapidly over the next two years, driving strong demand for Corning's glass substrate products. The firm's ability to create thinner and larger glass panels should support demand for ever-larger televisions and computer monitors."

The market for high-end phones and tablet computers is growing rapidly, driving the demand for sophisticated glass products like Corning's "Gorilla Glass," a tough new glass substrate.

Corning expects to benefit from the personal computer market's growth at a projected 16% compound annual rate through 2014 amid a shift to mobile computing, driven by the rapid growth of tablet-type computers.

Corning said two weeks ago that it aims to grow sales to $10 billion by 2014, compared to the $6.6 billion it reported last year.

Standard & Poor's gives its shares a four-star "buy" rating, one of its highest, and a 12-month price target of $24, an 8% premium to the current price. The company has a $35 billion market value.

Shares of Corning have been volatile on a longer-term basis. They are up 13% this year after gaining 1% last year, while in 2009 they gained 105%.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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