By Adam Barnett
Castlerock Asset Management is managed by Paul Tanico, and is a New York-based investment firm founded in 1993. The fund focuses on long/short term U.S. large/mid cap equity strategy and is fundamentally research driven. The fund recently filed its 13F with the SEC, describing some of its main investments during the first quarter of 2013. A quick look at the top five equity positions held by the fund might be a good starting point for your own research.
The fund's largest equity holding declared in the Q1 13F is in media giant CBS, with the fund reporting holdings of 118,708 Class B shares worth $5.542 million, a fall from the 161,101-share stake held at the end of last year. Price action for the stock this year has been bullish, and CBS recently reported record earnings for 2013 Q1; net earnings were $463 million or $.73 per diluted share, up from $394 million, or $.59 per diluted share, for the same prior-year period.
Revenue also exceeded the $4 billion barrier for the first time in the company's history, though the primary reason why Tanico and his team may be bullish is due to CBS' upcoming REIT spinoff. After selling its billboard assets in Asia and Europe, CBS plans to spinoff its U.S. outdoor advertising business into a REIT structure. Although the exact specifics of the deal aren't yet known, a one-to-one share transfer and a special dividend would be nice gifts for CBS investors, including Castlerock.
Next in line is United Rentals (URI), with the fund reporting 90,377 shares worth $4.9 million, a substantial fall from 181,730 shares held in the prior quarter. Price action for the stock has been bullish during 2013, with URI currently trading very close to its 52-week high at $58.53. URI reported a profit of $21 million, or 19 cents a share, up from $13 million, or 17 cents a share, from the corresponding quarter of the prior year.
Some bears may cite overvaluation as a reason to stay away from United Rentals, but in this momentum play's case, the valuation doesn't really matter. In the throws of the ongoing sequestration, businesses will continue to be forced into short-term rental agreements, and United Rentals' positioning as this space's largest lessor is any investor's dream. In short, URI is a play on continued uncertainty in Washington, and Wall Street's average price target predicts another 15-16% upside from current levels.
The best of the rest
The fund's next largest holding is a company that needs no introduction: Apple (AAPL). The fund reported holding 11,131 shares of the tech giant during the quarter; a comparable amount was held during the prior quarter. As most market watchers know, Apple's price action since September 2012 has been disappointing, selling off from a high of $705.07 to trade at about $444 currently. During 2013's first quarter, Apple posted quarterly revenue of $43.6 billion and quarterly net profit of $9.5 billion, or $10.09 per diluted share. By comparison, the company reported revenue of $39.2 billion and net profit of $11.6 billion, or $12.30 per diluted share, in the corresponding quarter of the prior year. Gross margin was 37.5 percent, compared with 47.4 percent in the year-ago quarter.
Moving forward, the crux of any Apple bull's argument rests on one process: new product introductions. If Cupertino is able to enter the solid-set TV space by the end of 2014, or if it can produce a meaningful entry into the wearable device market, investors' outlook could improve significantly.
Regarding the latter, it's unknown if Apple will choose to release a device for the wrist (iWatch) or the eyes (similar to Google Glass), but one other possibility is also intriguing: streaming music. Apple has been in negotiations with Sony and Warner, though no specific details have arisen over a potential "iRadio" service yet. We'll be watching the WWDC closely next month, and you should too.
The fourth-largest holding reported on the 13F is plastic and chemicals company LyondellBasell Industries (LYB). Castlerock reported holding 72,921 shares of the stock, worth about $4.6 million as of March 31, 2013, a significant fall from the 124,737 stake reported in the prior quarter. Price has been volatile during 2013, but the stock currently trades near its 52-week high at $64.56. During the first quarter, 2013, LYB posted a profit of $901 million, or $1.55 a share, against a profit of $600 million, or $1.04 a share, in the corresponding quarter of the prior year, beating analyst estimates.
At a trailing P/E of 11.88 and a forward P/E of 10.65, this is a value play. Additionally, S&P's outlook on the commodity chemicals sub-industry is positive moving forward, citing natural gas price declination and a housing market recovery as key reasons to be bullish.
Rounding out the fund's top five is post-bailout insurance company American International Group (AIG), with the fund holding 105,109 shares, worth approximately $4 million. The fund considerably scaled back its holdings, with 250,312 shares reported held in the prior quarter. Price action for AIG has been remarkably bullish, with the stock currently trading at $45.49, close to its 52-week high. AIG reported net income of $2.2 billion during the first quarter of 2013, which works out to $1.49 diluted EPS, a fall from $1.71 posted in the corresponding quarter of the prior year.
A forward P/E below 12 times year-ahead earnings is very attractive, and Wall Street still predicts another 6-7% upside from current levels. AIG's CEO has said that the insurer will pay a dividend "as soon as it makes sense," furthering the attractiveness of this stock. We originally reveled the potential of AIG late last year, when it displaced Apple as the hedge fund industry's favorite pick. In this case, Tanico is behaving very intelligently by following the rest of his smart money peers.