13-Fs And Spin-Offs: Assessing What The Super Investors Own

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Includes: BHF, BNED, DD, DOW, FOXA, KAR, UTX
by: Stock Spin-off Investing
Summary

We review 13-F filings of super investors to determine any notable spin-off investments.

Popular buys include United Technologies and eBay.

Off all the spin-offs reviewed, UTX, FOXA, and BHF appear the most interesting.

Charlie Munger famously advised Mohnish Pabrai that investors would be much better off if they did just three things:

  1. Carefully evaluated where other great investors are investing (through 13-Fs)

  2. Looked at the cannibals (companies that are buying back their stock)

  3. Carefully studied spin-offs

With that as a backdrop, let's review what some of the best investors in the world are doing in the spin-off world. Please note I focus on super investors with concentrated portfolios as it's easier to identify high-conviction bets.

Abrams Capital

Abrams didn't buy in any spin-offs this quarter. It decreased its holdings of Barnes & Noble Education (BNED), an unsuccessful spin-off.

Baupost Capital

Baupost's third largest position is Fox Corporation (FOXA). It owns over $1BN worth of the stock. Fox is a recent spin-off of 21st Century Fox. The majority of 21st Century Fox's assets were sold to Disney (NYSE:DIS). What remains (Fox Broadcasting Company, Fox News, Fox Business Network, and Fox Sports) comprises Fox Corporation.

It's easy to see why Baupost is interested in FOXA. As FOXA is geared towards live sports/news, it helps mitigate the headwind from the decline of linear TV. The stock also generates significant free cash flow.

Here's a good article that articulates the bull case.

Elliott Management

Elliott's 10th largest position is eBAY (NASDAQ:EBAY). It wrote an open letter to EBAY's board of directors in which it argued for the company to spin off its Classified business as well as StubHub. Management agreed to undertake a strategic review to evaluate the proposal and to give a board seat to Elliott as well as Starboard, another activist investor that owns the stock. Elliott argues that its proposal could result in a $55 to $63 stock price, well above EBAY's current share price of $36.50.

Greenlight Capital

Greenlight has long been optimistic about Brighthouse Financial (BHF). Currently, the stock is its fourth largest position. See Greenlight's Q1 letter to get the Firm's current outlook for the stock. In short, Greenlight believes BHF will earn $9 in adjusted earnings in 2019, implying it is trading at a P/E of 4.2x.

I continue to be interested in BHF given the appealing valuation. However, I struggle to get my hands around the company's balance sheet.

Maverick Capital

Maverick Capital's ninth largest investment is in DowDuPont (DWDP), which is currently undergoing a breakup. In the quarter, Maverick increased its position by 61%.

DWDP recently spun off Dow Corporation (DOW). Dow is focused on the commoditized chemical industry, but sports a juicy dividend (5.8%). DWDP's second spin-off, Corteva (NYSE:CTVA), which is focused on the agriculture market, will begin trading next week. It's currently trading at an issue price of $28.59 which implies a market cap of $21BN and an enterprise value of $27BN. Management has guided to 2019 EBITDA of $2.25BN (at the midpoint) resulting in an EV/EBITDA multiple of 12.0x. This appears fair.

The opportunity might be in the RemainCo (duPont de Nemours).

Pershing Square

Pershing Square's largest position is in United Technologies (UTX). Pershing Square along with Third Point were vocal in their calls for a break-up of United Technologies. Ultimately, management agreed with them, and UTX will spin off its elevator business (Otis) and Climate, Security, and Control business (Carrier) in the first half of 2020. The remaining company will be an aerospace pure play.

The stock looks attractive as it continues to sell at a discount to its breakup value.

Starboard Value

As discussed in the Elliott section, Starboard is invested in EBAY, and is pushing for the company to spin off its Classified business as well as StubHub. In addition, Starboard is invested in KAR Auction Services (KAR), which is scheduled to spin off its salvage auto auction business

Third Point

Third Point's second largest position is United Technologies. As described in the Pershing Square section, the stock is scheduled to break up into three separate companies in 2020 and looks attractive at its current valuation.

Conclusion

Of all the spin-offs and imminent spin-offs reviewed in this article, BHF, FOXA and UTX appear the most interesting. Any other super investors that you would like to see me follow? Let me know in the comment section, and I will include them in my next quarterly update.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.