Phil Falcone is the senior Managing Director at Harbinger Capital, a long/short equity hedge fund based in New York. He founded Harbinger in 2011 with Harbert Management Corporation, an investment company that provided most of the original funding. Prior to that, Falcone worked as a trader at Barclays Capital for three years. He is famous for his bets against subprime mortgages in the United States and the United Kingdom. According to Forbes, Falcone is the 540th richest man in the world with a net worth of $2.2 billion.
Recently Harbinger released its latest holdings in a 13F filing. Let's take a closer look at the most bullish bets of the fund and decide whether it makes sense to imitate these stock picks.
EXCO Resources Inc (XCO): XCO is also a large position in Harbinger's portfolio. The fund increased its XCO stakes by 30% over the fourth quarter. As of December 31, 2011, the fund reported owning $37 million worth of XCO shares. In addition to Harbinger, there were another 18 hedge funds with XCO positions at the end of the third quarter. For instance, both Ken Griffin's Citadel Investment Group and Bill Miller's Legg Mason Capital Management had more than $10 million invested in XCO at the end of September.
We agree with these hedge fund managers. XCO has been reshaping its portfolio by acquiring other companies as well as selling its own assets for the past few years. It has been focusing on tapping into its greatest potential since 2009, which has driven its production growth. XCO is a bit risky though. It is operating in a capital-intensive and cyclical industry. It has a beta of 1.37, which means that it is riskier than the market. XCO looks attractive because it has a low valuation. Its forward P/E ratio is 15.28 and it is expected to grow at 21.67% on the average per year over the next five years. So its P/E ratio for 2014 is only 10.3, versus 32 for Encana Corporation (ECA).
A few other big positions in Harbinger's portfolio include Harbinger Group Inc (HRG), CrossTex Energy Inc (XTXI), and North American Energy Partners (NOA). NOA seems to be an attractive investment as it is trading at low multiples and has great growth potential. Its forward P/E ratio is 7.91 and its expected growth rate is 11% on the average for the next five years.
Harbinger has a tilt toward small cap companies. The top five positions in its 13F portfolio all have market cap lower than $2 billion. We think it is a good strategy for investors who seek opportunities in small companies to focus on Harbinger's stock picks.