By Guan Wang
Louis Bacon is one of the most well-known traders of the past 20 years. He joined the sales and trading program at Bankers Trust after graduating from the MBA program at Columbia Business School, then went to trading currencies at Walter N. Frank & Co, working at New York Cotton Exchange, and trading financial futures at Shearson Lehman Brothers. In 1989, Bacon went on to found Moore Capital Management. One year later, Moore Global Investments was established with $25,000. Today, the fund has approximately $15 billion AUM and Bacon's personal wealth is about one-tenth of that.
Last month, Bacon released the 13F holdings of Moore Global Investments as of March 31, 2012 (check out Louis Bacon's top stock picks). What stocks are Bacon most bullish about and are they truly good investments? Let's check it out.
The top three equity positions in Louis' latest 13F portfolio are three financial stocks: JPMorgan Chase & Co (JPM), Wells Fargo & Co (WFC), and US Bancorp (USB). Amongst them, Wells Fargo and US Bancorp are new positions, and JPMorgan's stakes were largely increased, by over 1000%, in the first quarter.
The financial world has been surrounded by crisis over the past couple years, leaving many investors to panic about investing in the financial industry. While it is true that financial stocks bear relatively higher risks, such risks have been incorporated into their prices. For instance, JPMorgan, Wells Fargo and US Bancorp are all trading at very attractive multiples. Their current P/E ratios are all below 12. Billionaire Warren Buffett also likes Wells Fargo and US Bancorp. As of March 31, 2012, Buffett had $13.5 billion invested in Wells Fargo and another $2.2 billion invested in US Bancorp (check out Warren Buffett's top stock picks).
We like both these stocks. We are bullish about JPMorgan despite the reported $2 billion trading loss in the past month. While $2 billion is a big number, JPMorgan is still one of the best capitalized banks. Its Basel III Tier 1 capital ratio increased to 8.4% in the first quarter of 2012. On the negative side, the company recently suspended its $15 billion share repurchase program, which will lower its EPS growth. However, despite that, JPMorgan is still trading at only 6.3X its 2012 earnings, a significant discount to the industry average of 9.3. John Griffin, Lee Ainslie, Ken Fisher, John Paulson, Bill Miller, Cliff Asness, Ric Dillon, and Leon Cooperman all had over $100 million invested in JPMorgan at the end of the first quarter (see John Paulson's top holdings).
Another large position in Bacon's portfolio at the end of March is Medco Health Solutions Inc (MHS). Bacon boosted his stakes in this position by 586% over the first quarter. As of March 31, 2012, Moore Global Investments had $123 million invested in Medco. The stock is quite popular amongst the hedge funds we track. There were 68 hedge funds with Medco positions at the end of the first quarter, up from 52 hedge funds at the end of the previous quarter. Dan Loeb's Third Point initiated a new $141 million in Medco during the first quarter (see Dan Loeb's favorite stock picks). Thomas Steyer and John Paulson also like this stock.
The increased hedge fund interest in Medco comes from the $29.1 billion merger offer from Express Scripts (ESRX). The deal was completed on April 2. Medco was closed at $70.30 per share on March 30, the last day it was traded on the market. It was trading at around $60 per share in January and early February. If hedge funds purchased Medco at that time, which we believe is very likely, they should have made about 17% from this position.
Bacon also had $104 million invested in Goodrich Corp (GR) at the end of the first quarter. It was also a merger arbitrage play. The company is expected to be acquired by United Technologies Corp (UTX) for $18.4 billion, or $127.50 per share, at the end of this month. Its most recent closing price is $126.34 per share, up from $125.44 per share at the end of March. Forty-three hedge funds had Goodrich in their portfolios at the end of the first quarter. Big names include Thomas Steyer, James Dinan, and John Paulson.