Latest 13F Review: Howard Marks' Top Stock Picks

by: Insider Monkey

By Matt Doiron

Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds and other notable investors, including billionaire Howard Marks's Oaktree Capital Management. We use the information in these filings to help us develop investment strategies. For example, we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year and our own portfolio of the most popular small cap stocks based on 13F filings has outperformed the market by 33 percentage points in the last 11 months. Of course 13Fs are also useful for seeing how individual managers are playing the market and identifying initial investment ideas which may be good targets for further research. Read on for our quick take on Oaktree's five largest stock holdings as of the end of June, see the full filing on the SEC's website, and compare these picks to previous filings.

The firm maintained its ownership of about 51 million shares of First Bancorp (NYSE:FBP), a Puerto Rican regional bank. First Bancorp's stock price has more than doubled in the last year, even after a correction in its stock price in late July following the bank's slight earnings miss. On a trailing basis EPS are quite low compared to the stock's valuation, but Wall Street analysts expect business conditions to improve enough over the next year that the forward P/E is 15. We would note that First Bancorp is still down over 90% from its levels in mid 2008 as the financial crisis severely impacted Puerto Rican banks including peer Popular.

Marks and his team reported a position of close to 37 million shares in $1.9 billion market cap oil and gas exploration and production company Exco (NYSE:XCO). Exco's assets include acreage in shale plays across Texas, northern Louisiana, and Applachia. Nearly all of its production in terms of energy equivalent is natural gas, where market conditions have been poor for the last couple of years. Prices are expected to increase with demand, however, including the building out of export capacity. The stock is valued at 14 times forward earnings estimates given analyst optimism on the industry. Many market players are bearish on Exco, with 19% of the stock's float held short.

Charter Communications (NASDAQ:CHTR) was another of Oaktree's top picks with the filing disclosing ownership of a little less than 2 million shares of the TV, Internet, and phone company. Charter has been another winner so far in 2013, up about 70% year to date, as markets speculate that the drive towards consolidation in the cable industry could make Charter an acquisition target for a player such as Time Warner Cable. Charter's current enterprise value makes for a valuation of 10x its trailing EBITDA, and a very high multiple on its expected earnings for 2014; 13% of the float is held short as some bears are skeptical of the possibilities for a deal.

Dynegy (NYSE:DYN) has been a weaker performer this year than some of these other companies, but Marks added to his position between April and June to close Q2 with 7.8 million shares in his portfolio. Dynegy, an electric utility, emerged from bankruptcy in October 2012. It was unprofitable in the first half of 2013, underperforming analyst expectations in each quarter, and the sell-side expects the company to report net losses next year as well. Cash flow from operations was approximately zero in the first six months of the year as well, and so the stock should only be of interest to investors who are comfortable with turnaround situations.

Oaktree cut its stake in Delphi (NYSE:DLPH) but still owned 3 million shares of the auto parts company at the beginning of July. Up over 90% in the last year, the stock carries trailing and forward earnings multiples of 17 and 11 respectively as analysts expect auto demand to heat up in the near future. For example, many bulls argue that the U.S. consumer auto fleet is old in historical terms. Expectations for continued EPS growth result in a five-year PEG ratio of 0.9. Last quarter revenue grew 6% compared to the second quarter of 2012, and net margins improved as well resulting in 11% growth in net income.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.

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