Axial Capital is known as a Tiger Seed fund. It was founded by Eliav Assouline and Marc Andersen in 2002 with seeding from legendary hedge fund manager Julian Robertson. Following other Tiger Seeds, Axial also has offices at the historic 101 Park Avenue and is one of the members in the Tiger Management family tree. Axial Capital is a short seller fund. But unlike other short seller funds, it hedges its short positions by going long on major indices (the traditional way is to hedge long positions by shorting major indices).
As of December 31, 2011, there were 23 different put positions in Axial's 13F portfolio. To hedge against these put positions, the fund is also taking long positions on a few indices. For instance, the largest two positions in its latest 13F portfolio were SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and iShares Trust (NYSEARCA:IWM). Let's take a closer look at the major put positions in the funds and check out whether investors should also avoid or short these stocks.
Las Vegas Sands Corp (NYSE:LVS) is the largest put position in Axial's 13F portfolio. The fund boosted its position in LVS puts by 12% over the fourth quarter of 2011. At the end of last year, Axial had $56 million invested in this put position. LVS was quite popular among other hedge funds. There were 41 hedge funds with long positions in LVS at the end of last year. For example, Stephen Mandel's Lone Pine Capital had over $400 million invested in LVS stocks at the end of 2011. John Thaler and Lee Ainslie were also bullish about LVS.
LVS experienced strong revenue and earnings growth over the past year. For the fourth quarter of 2011, its revenue rose by 26% to $2.54 billion, versus a 14% growth for the industry average. Its EPS also improved by 15% during this period. Over the past year, LVS made $1.56 per share, up from only $0.05 per share for 2010. The strong performance of the company drives the growth of its stock price. During the past 52 weeks, LVS returned 45.42%, beating the S&P 500 index by about 43 percentage points.
Because of the significant appreciation over the past year, LVS now looks relatively expensive compared with its peers in the industry. It is currently trading at $55.77 per share and its P/E ratio is about 36, versus the industry average of 28.29. It is expected to earn $2.56 in 2012 and its forward P/E ratio is about 22, versus the industry average of 21.43. So, we think it is not a good time to purchase LVS right now as the stock looks to be trading at a premium. Moreover, the company is faced with relatively high risks. The company's future growth mainly relies on its projects in Asia and its strategy in Macao is largely dependent on whether it can successfully operate or sell some of its real estate assets. There are many uncertainties in the regulatory changes related to its new casino projects in Asia and its real estate in China and Singapore.
Grainger WW Inc (NYSE:GWW) puts are the second largest put positions in Axial's latest 13F portfolio. Axial increased its stake in this position by 40% during the fourth quarter. As of December 31, 2011, the fund reported to own $48.2 million of GWW puts. Ken Griffin and D.E. Shaw also invested in GWW Puts to hedge against their long positions.
The main strategies of GWW is expanding geographically to leverage its U.S. supply chain and diversify risk, and acquiring other companies to supplement its organic growth. GWW acquired Fabory Group in August last year. Fabory is a Netherlands-based company that distributes fasteners and related MRO products. GWW announced in November that it expected Fabory to add $0.03 per share to its EPS in 2012, down from the earlier $0.12 expectation, because of the poor European market.
Analysts expect GWW to make $10.54 per share in 2012, so its forward P/E ratio is about 20, higher than the 14 for WESCO International Inc (NYSE:WCC) and 17 for Applied Industrial Technologies Inc (NYSE:AIT). Over the longer term, GWW's earnings are expected to grow at 13% annually, versus 10% for WCC and 14% for AIT. So, though GWW also seems to have fair valuation levels and strong growth potential, there are better choices in the industrial equipment wholesale industry to invest in.
It seems that Axial's strategy is working. Assouline and Andersen, both under 40 years old, were named as two of Institutional Investors' 2010 Rising Starts of Hedge Funds. We think investors should be cautious about the positions that Axial is shorting.
Note: This article is written by Guan Wang and edited by Meena Krishnamsetty.
Disclosure: I am long SPY.