San Francisco-based hedge fund Passport Capital, founded in 2000 by Chief Investment Officer John Burbank III, manages over $4 billion in assets, including $1.25 billion in its latest 13-F filed for Q4. The firm starts with a macro-economic analysis and allocates capital based on global themes through a combination of traditional value-based stock-picking and long and short bets utilizing derivatives, commodities and credit swaps. The fund has returned well over 20% annualized returns since its inception in 2000, including a massive 217% return in 2007, based for the most part on their contrarian bet against rising real estate prices. The fund holds a diversified portfolio of 91 equity positions, about 40% each in large-caps and mid-caps, and the remaining 20% in small-caps.
We analyzed Passport'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):
Priceline.com Inc. (PCLN): PCLN, the pioneer of name-your-own price service, is a diversified online travel services company. It provides airline ticket, hotel room, car rental, vacation package, and cruise services through Priceline.com. Passport added $25 million in Q4 to its $21 million prior quarter position. Other major institutional investors with large bullish bets on PCLN in Q4 include hedge fund guru Stephen Mandel's Lone Pine Capital, adding 0.8 million shares to its 0.7 million share prior quarter position, hedge fund guru Andreas Halvorsen's Viking Global adding 0.3 million shares to its 0.3 million share prior quarter position and Chase Coleman at Tiger Global Management adding 0.8 million shares to its 0.4 million share prior quarter position.
PCLN has been one of the strongest performers of the last few years, up an astounding 15-fold plus in the last three-and-a-half years and almost 30-fold in the last six years, including being up 47% YTD in 2012. Earnings growth has kept pace with the rise in the stock price, up from $1.37 in 2005 to $23.45 in 2011 and a projected $38.31 in 2013. Thus, despite the huge run-up, the stock still trades at an attractive 17-18 forward P/E and 13.5 P/B compared to averages of 70.5 and 5.4 respectively for its peers in the Internet commerce group. While shares are a bit extended technically with the sharp rally this year, we would look at any pullback in this premium company as an opportunity to buy.
United States Steel Corp. (X): X manufactures flat-rolled and tubular steel products for the automotive, container, construction and appliance markets. Passport added $26 million in Q4 to its $1 million prior quarter position. Other major institutional investors that significantly added to their X position in Q4 include UBS AG adding 4.6 million shares to its 0.1 million share prior quarter position, and mutual fund giant Putnam Investment Management adding 0.8 million shares to its 0.3 million share prior quarter position. In a recent move, UBS perhaps talking from its book, raised its price target on X to $47 from $38 due to strong steel demand, lower costs year-over-year, and improving pricing environment for its products. US Steel shares currently trade at 8.2 forward P/E and 1.3 P/B compared to averages of 8.6 and 1.1 for its (large-cap) peers in the steel producers group.
Arcelor Mittal SA (MT): MT, one of the largest steelmakers in the world, is a Dutch manufacturer of finished and semi-finished carbon steel products used in the automotive, appliance and machinery markets. Passport added $8 million position in Q4 to its $1 million prior quarter position. Other major institutional investors that significantly added to their MT position in Q4 include mega fund Wellington Management adding 7.8 million shares to its 1.9 million share prior quarter position, Bank of America adding a new 0.7 million share position, and commodities-specialist Caxton Associates adding a new 0.2 million share position. MT trades at 6-7 forward P/E and 0.6 P/B compared to averages of 8.6 and 1.1 for its (large-cap) peers in the steel producers group.
AK Steel Holding Corp. (AKS): AKS is a U.S.-based manufacturer of flat-rolled carbon, stainless and electrical steels, and tubular products for the automotive, construction and appliance industries. Passport added $7 million in Q4 to its $1 million prior quarter position. Other major institutional investors that significantly added to their X position in Q4 include Carlson Capital adding an almost new 0.9 million share position, and mega fund Blackrock Fund Advisors adding 2.1 million shares to its 1.2 million share prior quarter position. AKS shares announced weak Q1 guidance earlier last week on Thursday, based on a lower LIFO credit; however, shares have actually gone up after the announcement as the company continues to trade at a cheap 6-7 forward P/E and 2.4 P/B compared to averages of 9.4 and 1.0 for its (mid-cap) peers in the steel producers group.
Other high conviction buys by Passport in Q4 include (see Table):
- Teck Resources Ltd. (TCK), a Canadian miner of coal, copper, zinc, molybdenum, gold and lead, mainly in Canada, the U.S., Chile and Peru, in which it added a $8 million to its $10 million prior quarter position; and
- Luxembourg-based Pacific Drilling SA (PACD), engaged in international offshore drilling of oil and natural gas using ultra-deepwater drilling rigs, in which it added a new $8 million position.
The following are Passport's high conviction bearish picks based on their Q4 selling activity (see Table):
- Walter Energy Inc. (WLT), a producer of hard coking coal from underground mines for by the steel industry, in which it cut $155 million from its $178 million prior quarter position;
- C & J Energy Services (CJES), that provides hydraulic fracturing and coiled tubing services, with a focus on complex, technically demanding well completions, to the large exploration and production companies with unconventional resource positions, in which it cut out completely its $63 million prior quarter position;
- Alkermes Plc (ALKS), an integrated biotech company, develops injectable and oral products for the treatment of central nervous system disorders, addiction, diabetes and autoimmune disorders, in which it cut $23 million from its $26 million prior quarter position;
- Youku.com Inc. (YOKU), China's largest video-streaming company, also more popularly known as the YouTube of China, that offers mostly professionally-generated content licensed from movie studios and TV companies, in which it cut $18 million from its $21 million prior quarter position;
- Vmware Inc. (VMW), a provider of virtualization software enabling organizations to run multiple operating systems on a single computer, in which it cut $12 million from its $14 million prior quarter position;
- Southern Copper Corp. (SCCO), engaged in the mining, exploring, producing, smelting and refining of copper and other minerals in Peru, Mexico and Chile, in which it cut $10 million from its $36 million prior quarter position; and
- LinkedIn Corp. (LNKD) operates an online professional network via its proprietary social networking platform that enables members to create, manage and share their professional identities online, build and engage with their professional network, access shared knowledge and insights, and find business opportunities, in which it cut out completely its $9 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.
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