Elm Ridge Capital’s Top Stock Picks

By Meena Krishnamsetty - June 6, 2012 | Tickers: AMLN, AGO, LMT, MBI, MRK | 0 Comments

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Ron Gutfleish runs hedge fund Elm Ridge Capital, with over $2 billion in AUM. Elm Ridge Capital returned an average of 9.5% between 2009 and 2011. Ron Gutfleish previously worked at Leon Cooperman’s Omega Advisors and Goldman Sachs. He has a Ph.D. from the University of California Berkeley. Below are his top 10 stock picks at the end of the first quarter (the activity column shows the percentage change in number of shares held by Dreman compared to the end of 2011):

Lockheed Martin (NYSE: LMT) is the largest position in Elm Ridge’s 13F portfolio at the end of March. The company recently won a contract to deliver IT and data solutions to US Department of Justice’s Bureau of Alcohol, Tobacco, Firearms, and Explosives and the US Marshals Service. The Enterprise Standard Architecture (ESA) IV contract is for seven years with the potential to expand to other agencies. Total contract value is capped at $496 million. This is a big win for LMT as the potential to spread to other agencies is huge. Also, the F-35 seems to have weathered the Fort Worth IAM strike and progress is on-track. There may even be potential for some foreign orders; LMT is hoping to sign a 4 F-35 order with Japan and expects a decision from South Korea this year. We further note that comparable companies in the space have been hiking their dividends for 2012, and we would not be surprised for LMT to do the same. John Shapiro, Geoffrey McCuskey, and Frank Brosens are positive on the stock, as are we.

Assured Guaranty (NYSE: AGO) had a solid Q1 with the Deutsche Bank settlement and loss-sharing arrangement finally being resolved. The settlement reduced AGO’s exposure to losses on residential mortgage-backed securities (RMBS) and bolstered its cash position. The company also pointed out an increase in claims paying resources to over $13 billion. However, Moody’s action of putting AGO’s Aa credit rating on watch for a possible downgrade sent the stock plummeting. More than anything, that seems to be the factor depressing the stock price. We remind investors that the downgrade is not for certain and think that AGO will still be able to write new business. Though it makes sense for AGO to trade at a discount to book value, ~0.3x Q1 adjusted per share book value is far too low in our opinion. We think the stock is undervalued.

MBIA (NYSE: MBI) is still mired in litigation with banks like Bank of America. MBI’s reported Q1 liquidity should be enough to cover expenses related to litigation resolution as it tries to recover some of the losses ($3 billion) related to ineligible Bank of America/Countrywide mortgage bonds it had guaranteed. If MBI wins the Article 78 case, this will be a positive headline for the company. We think that lawyer Marc Kasowitz has put forth a very strong defense and that arguments surrounding fraudulent conveyance and transparency of MBI’s transformation will prevail. We think that the courts will rule favorably to MBI’s transformation. If this happens, National Public Finance Guarantee will become its own separate entity and the only municipal-only financial guaranty company in the US.

Merck (NYSE: MRK) is the top healthcare stock in Elm Ridge’s portfolio. The hedge fund is bullish about healthcare stocks. The fund also had Boston Scientific (BSX), Eli Lilly (LLY), Wellpoint (WLP), and Pfizer (PFE) among its top 15 positions. Merck has been one of our top large cap pharma picks. It joined the throng of companies bidding for Amylin Pharmaceuticals (NASDAQ: AMLN) with a $25 per share offer. The lure of AMLN is Bydureon, its approved type 2 diabetes drug. We have long maintained that the global diabetes market is an extremely attractive one with a forecasted CAGR of 7% through 2017. AMLN also has Byetta in its product portfolio, which is also a drug for type 2 diabetes that has been commercially successful. Meanwhile, we are also more favorable on MRK’s odanacatib for phase III osteoporosis. There is elevated clinical risk for this late-stage drug but should phase III results prove positive, it would serve as a catalyst for the stock. 

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