Seeking Alpha
Profile| Send Message|
( followers)  

Louis Bacon is the manager of the New York based hedge fund, Moore Capital Management. He is ranked of as one of the Top 100 money earners and is considered to be one of the top 100 traders of the 20th century. Bacon currently believes there are too many uncertainties in the market and as a result he is wary of committing long-term capital.

However, he is quite bullish on resource stocks and sees opportunities for global macro trading due to divergences within the global investment landscape. This article will review five of the most recent stock purchases by Bacon in an attempt to uncover stocks that have been undervalued by the market in an attempt to maximize returns over the long term.

Varian Semiconductor Equipment (NASDAQ:VSEA)

Varian Semiconductor Equipment has a market cap of $4.85 billion and a price to earnings ratio of 17.02. Its 52 week trading range is $29.94 to $62.87 and is currently trading at around $63.00. Varian Semiconductor reported second quarter earnings 2011 of $328.44 million, a marginal decrease from first quarter earnings of $330.02 million. Second quarter net income was $67.40 million, a decrease from first quarter net income of $82.34 million. It has quarterly revenue growth of 44.20%, a return on equity of314.14%, and doesn’t pay a dividend.

One of Varian Semiconductor´s closest competitors is Axcelis Technologies Inc (NASDAQ:ACLS). Axcelis is currently trading at around $1.50 and has a market cap of $158.57 million. It has a price to earnings ratio of 36.34, quarterly revenue growth of 60.40% and a return on equity of 1.97%. It doesn’t pay a dividend.

Bacon holds 300,000 shares of Varian Semiconductor, buying the entire holding in second quarter 2011. The average purchase price per share was $56.00. Based upon the last trading price of $62.81, he has made a return of 12.16%.

Varian Semiconductor’s second quarter 2011 balance sheet showed cash of $491.06 million, an increase from first quarter cash of $363.83 million. In the second quarter 2011, it had net tangible assets of $982.21 million, an increase from first quarter’s $852.52 million.

Varian Semiconductor’s quarterly revenue growth of 44.20%, versus an industry average of 2.30%, and a return on equity of 314.14%, versus an industry average of 17.80%, indicates that it is substantially outperforming many of its peers.

The earnings outlook for the semiconductor industry is poor due to the depressed global economic outlook and declining consumer demand resulting from high unemployment and low consumer sentiment. However, the weaker US dollar makes US exports more attractive to overseas buyers and this bodes well for US based manufactures such as Varian Semiconductor.

Despite the poor industry earnings outlook, Varian Semiconductor has solid performance indicators and when this is combined with the increased cash holdings, I can understand Bacon’s decision to invest in the company. I rate Varian Semiconductor as a buy.

Aetna (NYSE:AET)

Aetna has a market cap of $15.17 billion, and a price to earnings ratio of 8.86. For a 52 week period, its trading range has been $29.54 to $46.01. It is currently trading at around $40.00. It reported second quarter earnings for 2011 as $8.34 billion, a decrease from first quarter earnings of $8.39 billion. Second quarter net income was $536.70 million, a decrease from first quarter net income of $586.00 million. The company has quarterly revenue growth of -2.40%, a return on equity of 17.68% and pays a dividend with a yield of 1.50%.

One of Aetna´s closest competitors is CIGNA Corporation (NYSE:CI). CIGNA currently trades at around $47.00 and has a market cap of $12.64 billion. It has a price to earnings ratio of 7.96, quarterly revenue growth of2.90% and a return on equity of 23.75%. It pays a dividend with a yield of 0.10%.

Bacon holds 375,000 shares of Aetna, buying 375,000 shares in second quarter 2011 at an average price per share of $41.83. Based upon the last trade price of $46.74, he has made a return of 11.74%.

Aetna’s cash position has improved, its second quarter 2011 balance sheet showed $1.77 billion in cash, an increase from $1.66 billion in the first quarter. Its quarterly revenue growth rate of -2.40% is substantially less than the industry average of 21.60%, and its return on equity of 17.68%, is on par with the industry average of 17.20%. Based on these performance indicators Aetna is underperforming some of its peers.

The outlook for the health care plan industry is subdued due to the poor state of the broader economy and possible policy changes to the US Health System. When taking this outlook into account in combination with Aetna’s poor quarterly revenue growth rate and marginal decrease in net income, it is difficult to see any future growth potential in the stock price. On this basis I do not agree with Bacon’s decision to invest in the stock and rate Aetna as a hold.

Arch Coal Inc (NYSE:ACI)

Arch Coal Inc has a market cap of $4.23 billion and a price to earnings ratio of 20.72. Its 52 week trading range has been $13.09 to $36.99. It is currently trading at around $20.00. It reported second quarter 2011 earnings of $985.10 million, an increase from first quarter earnings of $872.94 million. Second quarter net income was $11.08 million, a substantial decrease from first quarter net income of $55.60 million. Arch Coal has quarterly revenue growth of 28.90%, a return on equity of 5.69%, and pays a dividend with a yield of 2.60%.

One of Arch Coal’s closest competitors is Alpha Natural Resources Inc (NYSE:ANR). Alpha Natural Resources is trading at around $27.00 and has a market cap of $5.97 billion. It has a price to earnings ratio of 90.34, quarterly revenue growth of 59.30% and a return on equity of 0.67%. It doesn’t pay a dividend. While Alpha Natural Resources has stronger performance indicators, its aggressive price to earnings ratio and lack of a dividend, makes Arch Coal a superior investment prospect.

Bacon holds 1,695,000 shares of Arch Coal, purchasing the entire holding in the second quarter 2011, at an average price of $29.83 per share. Based on the last trading price of $26.51, a return of -11.13% has been made.

Arch Coal’s cash position has substantially increased, the second quarter balance sheet showed $458.87 million in cash, an increase from $101.12 million for the first quarter. Arch Coal’s quarterly revenue growth rate of 28.90% is greater than the industry average of 21.70%, and its return on equity of 5.69%, is less than the industry average of 24.60%. This indicates that Arch Coal is underperforming many of its peers.

The boom in demand for resources driven by the growth of the Chinese economy indicates further opportunities for strong revenue growth in the resources industry. When combined with a weak dollar, that should make U.S. exports more competitive, it bodes well for coal demand and producers like Arch Coal.

Based on the positive industry outlook combined with Arch Coal’s strong quarterly revenue growth rate and increased earnings, it is clear why Bacon has invested in this stock. Accordingly I rate Arch Coal as a buy.

Kosmos Energy Limited (NYSE:KOS)

Kosmos Energy Limited has a market cap of $6.27 billion and doesn’t have a price to earnings ratio. Its 52 week trading range has been $10.10 to $19.70 and is trading at around $16.10. The company reported second quarter earnings 2011 of $127 million, an increase from first quarter earnings of $95.40 million. Second quarter net income was $-9.09 million, an increase from first quarter net income of -$54.70 million. The company has quarterly revenue growth of 10,218.90%, doesn’t produce a return on equity or pay a dividend.

One of the Kosmos’ closest competitors is Hess Corporation (NYSE:HES). Hess is trading at around $67.00, has a market cap of $22.14 billion, and a price to earnings ratio of 8.00. It has quarterly revenue growth of 26.90%, a return on equity of 16.25% and pays a dividend with a yield of 0.70%. While Hess is outperforming Kosmos it is important to consider that Kosmos has only recently listed on the NYSE and is in a strong development phase.

Bacon holds 1,366,800 shares of Kosmos, purchasing the entire holding in second quarter 2011, as part of the Kosmos IPO in May 2011 at a price of $18.00 per share. Based on the last trade price of $16.13 this investment has yielded a return of -10.39%.

Kosmos’ cash position has increased, its second quarter balance sheet showed $844 million in cash, an increase from first quarter cash of $291 million. With quarterly revenue growth of 10,218.90%, versus an industry average of 19.00%, and no return on equity versus an industry average of 15.30%, it is difficult to compare Kosmos to its industry peers, especially as the company has only recently listed on the NYSE.

Given the current strong demand from China for resources combined with a lower US dollar that should make US exports more competitive the future bodes well for oil and natural gas producers such as Kosmos.

Based on the current outlook that strong demand for resources such as oil and gas will continue, combined with Kosmos’ strong increase in earnings and the opportunity to invest in a strongly performing startup, it is clear why Bacon has invested in Kosmos. On this basis I rate the company as a buy.

EXCO Resources Inc (NYSE:XCO)

EXCO Resources Inc has a market cap of $2.87 billion and a price to earnings ratio of 30.16. Its 52 week trading range is $9.33 to $21.04 and it’s trading at around $13.50. It reported second quarter earnings 2011 of $206.83 million, an increase from first quarter earnings of $161.23 million. Second quarter net income was $82.36 million, a substantial increase from first quarter net income of $21.94 million. It has quarterly revenue growth of 74.80% and a return on equity of 6.04% and pays a dividend with a yield of 1.40%.

One of EXCO Resource´s closest competitors is SandRidge Energy Inc (NYSE:SD). SandRidge Energy is trading at around $8.20 and has a market cap of $3.27 billion. It doesn’t have a price to earnings ratio. It has quarterly revenue growth of 99.90%, a return on equity of 3.92% and doesn’t pay a dividend. Based on these key performance indicators, EXCO has a superior dividend yield and return on equity.

Bacon holds 2,605,500 shares of EXCO Resources, purchasing 2,335,724 shares in second quarter 2011, adding to an existing holding of 269,776 shares. The total share holding was purchased at an average price per share of $19.59. Based on the last trade price of $13.47, a return of -31.24% has been made.

EXCO Resources’ second quarter 2011 balance sheet showed cash of $214.40 million, an increase from first quarter cash of $159.12 million. It has net tangible assets in the second quarter of $1.43 billion, an increase from first quarter’s $1.35 billion.

EXCO Resources’ quarterly revenue growth of 74.80% versus an industry average of 19.00%, and a return on equity of 6.04% versus an industry average of 11.40%, demonstrates that it is outperforming the majority of its peers, although it needs to focus on improving its return on equity.

The ongoing boom in demand for resources driven by the growth of the Chinese economy indicates further opportunities for revenue growth. When combined with a weak dollar, that should make U.S. exports more competitive, it bodes well for oil and natural gas demand and producers like EXCO Resources.

Source: Rating 5 Recent Buys From Louis Bacon Of Moore Capital Management