The firm’s investment strategy is defined by six principles:
· Sustainable above-average earnings growth
· Leadership position in a promising business space
· Significant competitive advantages/unique business franchise
· Clear mission and value-added focus
· Financial strength
· Rational valuation relative to the market and business prospects
Sands has produced stellar returns. In the last five years he beat the S&P 500 35.9% to -1.1% cumulatively. In 2008, he underperformed the abysmal S&P – -48.67% compared to -37%, but rebounded 71.37% compared to 26.5% in 2009.
In the second quarter, he made the controversial decision to buy Facebook (FB) and added to his holdings in Coach (COH), Google (GOOG) and Apple (AAPL).
Sands bought 11,649,292 shares of Facebook in the second quarter at an average of $30 per share, making him the company’s seventh largest investor.
Facebook is the social media site founded by Mark Zuckerberg that premiered in a debacle of an IPO in May. Shares were initially offered at $38 each, a record $104 billion valuation, and a P/E ratio of almost 100 times projected earnings for the following 12 months. The stock price immediately began a long descent, falling to a new low of $18.06 on Friday.
Some investors were vocally upset about the investment, including the N.C. Retired Governmental Employees Association, as the state’s pension fund is managed by Sands, who purchased 618,000 Facebook shares for it. A spokeswoman for the department countered that the IPO investment was “less than a tenth of 1 percent of the pension fund’s global (stock portfolio,” the Associated Press reported.
Facebook’s IPO prospectus showed three years of revenue and earnings growth. Revenue grew from $777 million in 2009 to $3.7 billion in 2011, and net income grew from $229 million in 2009 to $1 billion in 2011. The company also acknowledged that its rate of growth would decline in the future as the size of its user base increases and it reaches higher market penetration.
Because Facebook had not yet found a way to show ads to users on mobile apps, the biggest threat to the company’s continued ad-driven revenue growth was the increasing number of mobile users.
The lock-up period prohibiting employees from selling their shares expires in November, meaning if they decide to sell it could further depress the stock. Early investors were allowed to sell their shares beginning in August. The stock declined 13.4% that month.
Fortunately, Facebook accounts for only 1.6% of Sands’ portfolio.
Sands also added to his positions in three high-growth companies in the second quarter:
Sands added 2,698,721 shares of Coach to his holding at an average price of $68. He initiated the position in 2011, and had a total of 8,851,948 shares at the end of the second quarter.
Coach Inc. is a designer, producer and marketer of high-quality, modern, American classic accessories that complement the diverse lifestyles of discerning women and men. Coach Inc. has a market cap of $16.06 billion; its shares were traded at around $58.13 with a P/E ratio of 15.8 and P/S ratio of 3.4. The dividend yield of Coach, Inc. stocks is 2.2%. Coach Inc. had an annual average earnings growth of 25.7% over the past 10 years.
Coach has a market value of $16.6 billion, the largest of its competitors in the retail industry. In the second quarter, the company increased its net sales 15% and net income 18% year over year due largely to its key initiatives: growing its international business, becoming a market leader in men’s accessories, harnessing the power of the digital world, and in fiscal 2012, accelerated the acquisition of key Asian domestic distributors – including in Malaysia and Korea – and rapidly grew distribution in China and other emerging luxury markets.
Sales at the company’s North American factory stores were lower than expected due to an increasingly promotional environment, to which it responded with in-store couponing.
Sands added 219,500 shares of Google at an average price of $599 to the position he initiated in the first quarter of 2011. At the end of the quarter he owned a total of 2,428,364 shares. The stock is up to $684 on Friday.
Google is a public and profitable company focused on search services. Google Inc. has a market cap of $221.93 billion; it has a P/E ratio of 19.9 and P/S ratio of 5.9. Google Inc. had an annual average earnings growth of 51.9% over the past 10 years. GuruFocus rated Google Inc. the business predictability rank of 2.5-star.
In the second quarter, Google’s revenue increased 35% year over year. It also introduced its Nexus 7 tablet, a 7-inch tablet that runs Android and retails for $199, the same price as the Kindle fire. Google launches the product in Europe on September 3. Current estimates are that it has sold about one million units since its release in July.
Sands added 205,075 shares of Apple at an average price of $583 to the position he initiated in the first quarter of 2011 at an average price of $346. The stock trades for $665 on Friday.
Apple Computer Inc. designs, manufactures and markets personal computers and related personal computing and communicating solutions. Apple Inc. has a market cap of $620.15 billion; it has a P/E ratio of 15.6 and P/S ratio of 5.7. The dividend yield of Apple Inc. stocks is 0.4%. Apple Inc. had an annual average earnings growth of 63.5% over the past five years.
In the second quarter, Apple’s blazing growth continued. Revenue increased 22% and earnings rose 20.6%, with iPhone sales increasing 28%, iPad sales increasing 84% Mac sales increasing 2% and iPods increasing 10%.
See Frank Sands’ portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Frank Sands.