By Matt Doiron
Oaktree Capital Management (OAK) was founded in 1995 and manages investments in stocks and bonds. Managed by Howard Marks, who has an estimated net worth of $1.5 billion, the fund disclosed some of its long positions in its 13F filing for the second quarter. We have gone through it and picked out the five largest reported stock positions from the end of June:
According to the filing, the fund's largest equity investment was in Charter Communications (CHTR), which provides cable TV and Internet services. The 16.5 million shares of the company in Oaktree's portfolio made it by far the largest holding disclosed in the 13F. Charter Communications' past four quarters have been remarkably bad; in each case the company's net losses per share have been over 60% greater than what Wall Street expected. But the stock has risen 33% this year and now analysts are forecasting profitability next year (albeit at a forward P/E of 105). As a long-term owner of the stock, Oaktree has done very well. George Soros boosted his position in CHTR by 76% during the second quarter as well.
CIT Group (CIT) is another company whose earnings history is not particularly good, but once again the sell-side expects that the commercial bank's net losses of $2.55 per share this year will not only vaporize but become a gain of $3.49 per share in 2013. In this case, if the company is able to meet these targets, then it will be in a good position in terms of value: The P/E based on those forward earnings expectations is a respectable 11. Alternatively, the company trades at 0.9 times the book value of its equity. Oaktree reported a stake of 8.2 million shares in CIT Group, down slightly from the end of the first quarter.
The fund owned about 37 million shares of EXCO Resources (XCO), an independent oil and gas exploration and production company which focuses on onshore shale fields in the United States, mostly in Texas and Appalachia. Sales and earnings per share at EXCO are expected to fall this year compared to 2011, and earnings per share are expected to fall further next year. Those analyst expectations imply a forward P/E of 30. Of course, the company has significant commodity exposure and we would guess that much of its recent woes have been due to low natural gas prices. Billionaire Wilbur Ross is also very bullish about XCO with a 32 million share position.
The fourth largest position reported on Oaktree's 13F was its 51 million shares of First Bancorp (FBP). The Puerto Rico-based retail bank trades at 13 times forward earnings, but at a P/B of only 0.6. The stock is extremely sensitive to the broader markets at a beta of 3.1, and some of the low book multiple likely comes from its focus outside the 50 states; but there is a value case to be made. Oaktree initiated its position in First Bancorp in the fourth quarter of 2011 and the stock is up 7% so far this year.
Finally, the fund reported a stake of 9.4 million shares in Spirit Airlines (SAVE). However, as we reported in early August, Oaktree has since sold out of Spirit Airlines. While Spirit trades at apparent value multiples, such as a trailing P/E of 13 and a forward P/E of 8, we had thought that his decision was a good call as major airlines are trading at even lower earnings multiples. Since then, there has been insider buying at Delta Air Lines (DAL) and United Continental (UAL) and so we're fairly confident that either of these companies, as well as US Airways, are better buys.
As far as Oaktree's other positions, we prefer to see companies which are earning steady profits and trade at a low multiple of those profits. CIT and First Bancorp might not be bad picks, but megabanks such as Citigroup Inc (NYSE:C) and Bank of America (NYSE:BAC) trade at low (often lower) multiples as well, and despite those companies' troubles we think they are likely to at least be safer investments.
Disclosure: I am long C.