San Francisco-based hedge fund manager Farallon Capital Management, founded and led by Goldman alum Thomas Steyer in 1986, is the 12th largest hedge fund in the world with $21.5 billion in assets. Its investments are well diversified into value investments, credit investments, merger arbitrage, real estate related investments, and direct investments in both developed and emerging markets. Furthermore, it also engages in event-driven international investing, and the success of its early investments in Indonesia in 2002 are widely credited with jump-starting the flow of foreign direct investment into the country from $286 million a year to over $4 billion in 2008.
In this article, we focus on the $4.2 billion of assets reported in the Q4 13-F that was filed last Tuesday, on February 14th. About two-thirds of its 13-F assets are deployed in large-caps, another 20% is deployed in mid-caps, and the remaining 10%-15% is in small-cap equities. Also, the fund is over-weight in technology and industrials, and it is under-weight health-care and energy sectors.
The following are stocks that Farallon is bullish on, based on its Q4 filing, and that are also trading under-valued compared to the peers in their group (see Table):
Qualcomm Inc. (NASDAQ:QCOM): QCOM is a designer of CDMA-based, RF and power management ICs for system software used in wireless handsets, modem cards and networks. Farallon added a new $69 million position in Q4, their second largest outside of the merger arbitrage plays discussed later in this article. Besides Farallon, other major funds that made significant additions of QCOM to their portfolios in Q4 include mega funds Goldman Sachs (NYSE:GS) (6.6 million shares), BNY Mellon Corp. (NYSE:BK) (6.5 million shares), and Wellington Capital Management (3.8 million shares); and also guru fund Viking Global Investors (5.7 million shares).
QCOM released an outstanding Q4 report just over two weeks ago, beating revenue ($4.68 billion v/s $4.58 billion) and earnings (97c v/s 90c) estimates, and guiding next quarter revenues and earnings higher. The stock has broken out of a long-term consolidation pattern and is currently trading at almost twelve-year highs at 15-16 forward P/E and 3.8 P/B compared to averages of 39.1 and 3.3 for its peers in the wireless equipment group.
Check Point Software Technology (NASDAQ:CHKP): CHKP is an Israeli provider of internet security software, hardware and services. Farallon added a new $72 million position in Q4, their largest outside of merger arbitrage plays. CHKP last month released a good Q4, beating analyst revenue and earnings estimates, and indicating strong growth of its high-end appliances. The favorable Q4 report helped alleviate earlier concerns about the strength of its product portfolio, and suggested that spending on the company's network security products would continue despite the over-hang of macro-economic uncertainty, especially in Europe. Its shares currently trade at 16-17 forward P/E and 3.9 P/B compared to averages of 31.4 and 4.2 for its peers in the computer software group.
Pall Corp. (NYSE:PLL): PLL is a leading supplier of high-tech filtration, separation and purification technologies for the removal of solid, liquid and gaseous contaminants, serving the global life sciences and industrial sectors. Farallon added a new $60 million position in Q4, its third largest outside of the merger arbitrage plays. Besides Farallon, other major funds that made significant additions of PLL to their portfolios in Q4 included mega funds Morgan Stanley (0.6 million shares) and JPMorgan Chase (0.5 million shares). PLL shares currently trade at 17-18 forward P/E and 4.8 P/B compared to averages of 31.7 and 3.5 for its peers in the pollution control group.
Some other big names that appear on its 13-F, in which it added significantly in Q4, appear to be merger arbitrage plays, since many of these companies are under acquisition agreements. These include:
- Oil and gas exploration, production and transmission company El Paso Corp. (EP), that announced a definitive agreement to be acquired in mid-October last year by Kinder Morgan Inc. (NYSE:KMI), a provider of energy transportation and storage services in North America, at a 37% premium at $26.87 a share. Farallon holds $395 million worth of EP stock, a new position that it acquired in Q4, and its position seems to have done well since EP shares have traded up from $23-$25 just after the merger was announced to over $27;
- Pharmasset Inc., a developer of pharmaceuticals to treat viral infections, and a leader in the hepatitis C space, that was acquired by Gilead Sciences Inc. (NASDAQ:GILD) last year. GILD is a developer of therapeutics to treat viral, fungal, respiratory and cardiovascular diseases, and Farallon held a $160 million new position in the company at the end of Q4, which would have been converted to GILD stock when the acquisition was completed in January.
- Motorola Mobility Holdings (NYSE:MMI), a manufacturer of wireless handsets, set-top boxes and video distribution systems for home, network and telecom markets, that announced entering into an agreement to be acquired by Google (NASDAQ:GOOG) in August of last year for $40 per share in cash, at a premium of over 60% to its closing price the prior day. Farallon held a $469 million position in MMI at the end of Q4, a position it initiated in Q3 with 10.6 million shares and then added another 1.2 million shares in Q4.
- Goodrich Corporation (NYSE:GR), a manufacturer of aircraft landing and actuation and power systems, nacelles, and engine and electronic components, that announced an agreement in September of last year to be acquired by industrial conglomerate United Technologies (NYSE:UTX). Farallon held $431 million in GR stock at the end of Q4, a position it initiated in Q3 with 1.2 million shares, and added 2.2 million shares in Q4. GR shares too have risen from $120-122 when the merger was announced to over $125, so Farallon seems to have done well on holding that position;
Select Stocks that Farallon is most bearish on based on its moves in Q4 (see Table) include:
- Capitalsource Inc. (NYSE:CSE), a specialized commercial finance company offering asset-backed, senior, cash flow and mezzanine financing to small and mid-size borrowers, in which Farallon cut out completely its $276 million prior quarter position;
- Home Depot Inc. (NYSE:HD), that operates as a home improvement retailer, selling a broad range of building materials, home improvement products, and lawn and garden products to do-it-yourself, do-it-for-me and professional customers via 2,248 stores in the U.S, Canada, Mexico and China, in which Farallon cut out completely its $99 million prior quarter position;
- Visa Inc. (NYSE:V), a provides of global retail electronic payments network in support of the credit and debit payment programs of financial institutions, in which it cut $78 million from a $191 million prior quarter position;
- Comcast Corp. (NASDAQ:CMCSA), a provider of cable services and content to 22.8 million subscribers in 39 states, as well as Internet and phone services, in which it cut $74 million from its $201 million prior quarter position;
- Schwab Charles Corp. (NYSE:SCHW), a provider of brokerage, banking and financial services to individual and institutional clients, in which it cut out completely its $52 million prior quarter position; and
- Southern Union Co. (NYSE:SUG), a company engaged in the gathering, processing, transportation, storage and distribution of natural gas in the U.S., in which it cut out completely its $51 million prior quarter position.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.