New York-based Long/Short Equity Hedge Fund Kingdon Capital Management LLC founded in 1983 by Mark E. Kingdon manages $1.9 billion in 13-F assets, per its latest Q4 filing with the SEC last month. Mr. Kingdon began his career as a pension fund administrator with AT&T (T), and then worked for Century Capital Associates for eight years prior to founding Kingdon Capital Management.
The firm invests in growth and value stocks across the market capitalization range, and they employ a top-down approach to select the economies and a bottom-up stock picking approach to make its investments. Long-term, the firm has generated an outstanding 15%-18% compounded return for investors over the last 25 years, well ahead of the 9% annual return of the S&P 500 index over the same period. The fund holds a diversified portfolio of 110 equity positions, about half of that in large-caps, another third in mid-caps and the remaining 15%-20% in small-caps.
We analyzed Kingdon's equity holdings in its Q4 13-F to determine its highest conviction bets, selecting the largest buys and sells in size, where the buy/sell is also a significant proportion of its prior quarter position in that company. Based on that analysis, the following are its high conviction bullish positions, that are also trading at a discount to the peers in their group (see Table):
Delphi Automotive Plc (DLPH): DLPH manufactures vehicle components, powertrain, safety and thermal technology solutions for automotive and commercial vehicle markets worldwide. Kingdon added a new $43 million position in Q4. Other major institutional investors with large bullish bets on DLPH in Q4 include famed hedge fund company Paulson & Co. adding a new 51.7 million share position, and hedge fund Oaktree Capital Management adding a new 24.6 million share position.
DLPH has been a strong performer, rising more than 50% from its $20 IPO price about four months ago. The company reported a stellar Q4 at the end of January, beating estimates and guiding FY earnings higher. Its shares are up strongly since that stellar report; however, they still trade at a reasonable 7-8 forward P/E and 6.2 P/B compared to averages of 8.7 and 2.7 for its peers in the auto/truck OEM group, while earnings are projected to grow at a strong 11.9% annual rate from $3.33 in 2011 to $4.17 in 2013.
Lowe's Companies Inc. (LOW): LOW operates as a home improvement retailer operating 1,749 stores in the U.S., Canada and Mexico. Kingdon added a new $20 million position in Q4. Other major institutional investors with large bullish bets on LOW in Q4 include mega fund Wellington Management adding a 25.6 million shares to its 45.5 million share prior quarter position, and Fidelity Investments adding 18.3 million shares to its 21.7 million share prior quarter position.
LOW reported a strong Q4 at the end of last month, beating analyst earnings and revenue estimates, and guiding FY EPS in-line. Its shares, up more than 50% in the last six months, are in strong rally mode, looking to attack its all-time highs in the $35 range set in early 2007. The strong rally in both LOW and its closest peer and prime competitor Home Depot Inc. (HD) are backed by strong revenue and earnings growth, a stabilization and possible recovery in the housing market going forward, and a slow but gradual improvement in the economy. LOW shares currently trade at a reasonable 14 forward P/E and 2.3 P/B compared to averages of 17.2 and 2.6 for its peers in the building products retail/ wholesale group, while earnings are projected to rise at a 14.2% compound growth rate from $1.67 in 2012 to $2.18 in 2013.low
Ingersoll-Rand Co. (IR): IR is a manufacturer of a diverse range of industrial and commercial products, including climate control units, fluid handling systems, compressed air systems, biometric access control systems and energy efficient solutions. Kingdon added a new $16 million position in Q4. Other major institutional investors with large bullish bets on IR in Q4 include T Rowe Price adding 9.7 million shares to its 17.5 million share prior quarter position, and Wellington Management adding 1.4 million shares to its 5.2 million share prior quarter position. IR trades at 11-12 forward P/E and 1.7 P/B compared to averages of 12.8 and 2.6 for its peers in the general industrial machinery group.
International Paper Co. (IP): IP is a paper and packaging company with worldwide operations, manufacturing containerboards, printing and writing papers, market pulp and coated paperboard. Kingdon added a new $11 million position in Q4. Other major institutional investors with large bullish bets on IP in Q4 include Neuberger Berman Group adding 2.3 million shares to its 1.1 million share prior quarter position, and JP Morgan adding 2.1 million shares to its 0.7 million share prior quarter position. IP reported a good Q4 at the beginning of last month, beating earnings (66c v/s 61c) and missing revenues ($6.37 billion v/s $6.52 billion). Its shares trade at 10 forward P/E and 2.2 P/B compared to averages of 10.6 and 4.0 for its peers in the paper and related products group, while earnings are projected to rise at a modest 6.4% annual growth rate from $3.10 in 2011 to $3.51 in 2013.
Other high conviction buys by Kingdon in Q4 include (see Table):
- Amylin Pharmaceuticals (AMLN), a developer of drugs for the treatment of diabetes, obesity and other diseases, in which it added a new $19 million position; and
- Amarin Corp. (AMRN): AMRN is a clinical stage Ireland-based global pharmaceutical group, which develops novel drugs for the treatment of cardiovascular diseases using its proprietary advanced oral and trans-dermal drug delivery technologies, in which it added $14 million to its $8 million prior quarter position.
The following are Kingdon's high conviction bearish picks based on their Q4 selling activity (see Table):
- Level 3 Communications (LVLT), the operator of one of the largest Internet backbones in the world, and also one of the largest providers of wholesale dial-up service to ISPs in North America, and a primary provider of Internet connectivity for millions of broadband subscribers through its DSL and cable partners, in which it cut out completely its $220 million prior quarter position;
- Apple Inc. (AAPL), probably among the most innovative companies the world has ever known, and a maker of the iPhone, iPod, and iPad, this company founded by the late Steve Jobs is one of the world's largest manufacturers of personal computers, mobile communication devices, and portable digital music players, in which Kingdon cut $121 million from its $333 million prior quarter position;
- DuPont De Nemours & Co. (DD), that manufactures agricultural, food, building, communications, construction, electronics and other products and raw materials, in which it cut out completely its $48 million prior quarter position;
- Freeport McMoran Copper & Gold (FCX), engaged in the exploration and development of copper, gold, silver and molybdenum mines in Indonesia, North and South America, in which it cut out completely its $40 million prior quarter position;
- Broadcom Corp. (BRCM), a provider of a portfolio of system-on-a-chip and software solutions for wired and wireless communications to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices, in which it cut out completely its $30 million prior quarter position;
- Micron Technology (MU), a leading manufacturer of semiconductor memory solution, including DRAM, NAND and NOR flash memory, phase change memory, and image sensors, in which it cut out completely its $29 million prior quarter position;
- Mosaic Inc. (MOS), one of the world's leading producers and marketers of concentrated phosphate and potash crop nutrients for the global agriculture industry, in which it cut out completely its $29 million prior quarter position; and
- Consol Energy Inc. (CNX), a producer of bituminous coal and coal-bed methane gas, primarily in the northern and central Appalachian and Illinois basins, in which it cut $28 million from its $35 million prior quarter position.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.