A Big-time Hedge Fund's Newest Picks
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Passport Capital, managed by John Burbank, was founded in 2000 and focuses on fundamental macroeconomic insight in toggling its investment strategies. As detailed in his first quarter letter to investors, Burbank is quite bearish on the broader economic picture and on U.S. equities. His dictum for now is that “price is a liar”; the overall liquidity issue present with most central banks, along with what he sees as a looming deflation problem, are making him clutch gold and pen alternative strategies. For him, a recession in late 2012 or early 2013 is more likely than not.
On Aug. 14, the company released its 13F summary of its portfolio holdings (you can see Passport's portfolio here). We can get a good sense of Burbank's macroeconomic assessment—and his equities outlook—from any shake-ups since his first quarter filing.
First thing to note here is the addition of a put option position on ExxonMobil (NYSE: XOM), one of Passport's ten largest holdings by total value. This is in line with Burbank's “very bearish” outlook on the macroeconomy. In the event of a recession, demand for oil will obviously decrease, and super major integrated oil companies like ExxonMobil will suffer. The company is presently trading at its highest levels since 2008, and in the event of a recession, Exxon shares could dip to around $70 from their present prices in the high $80s.
Interestingly, Passport is also long on Marathon Petroleum (NYSE: MPC). This company is the downstream spin-off of Marathon Oil (MRO), meaning that it largely deals with refining, distribution, and the chemical segment of the oil business. Marathon Petroleum Corp, like Phillips 66 (PSX), actually benefits from depressed oil prices because of a more beneficial crack spread, that is, wider margins stemming from lower crude purchase prices and stable sale prices of refined product. Warren Buffett's Berkshire Hathaway seems to agree—it disclosed Phillips 66 holdings recently, which we have discussed elsewhere.
The fund stresses the importance of owning physical gold over gold equities. It has a put in place for the Market Vectors Gold Miners ETF (GDX), while the fund continues to add to its physical gold holdings. As Burbank noted in his first quarter letter, gold equities were down about 1 percent for the year, while physical gold was up about 8 percent. He has the same strategy for crude oil: pass on the ETF and buy the stuff itself. Burbank is also shorting the broad market, with a large index ETF put position.
Vivus (NASDAQ: VVUS) is a top holding in Passport's portfolio, with a position valued at $232 million according to the 13F. Vivus, a pharmaceutical company that specializes in obesity and related medical conditions, saw its shares rocket over the past year—they are up 130 percent year-to-date. I should mention Arena Pharmaceuticals (NASDAQ: ARNA), a company that also focuses in obesity treatment also has seen lots of price activity over the past year. These biotech stocks tend to rely on the release and sale of drugs, the demand for which are in large part resistant to broader economic conditions. Hedge funds generally bet on Vivus instead of Arena over the past year. We recently wrote an article comparing these two stocks and concluded that Arena seems to be a better bet than Vivus which may have some patent problems with one of the compounds used in Qsymia, its weight loss drug.
Passport also has a $175 million position in Cytec Industries (NYSE: CYT). The company recently announced the divestiture of its coating resins business, which is a more cyclical business than its other areas. The specialty products the company produces have broad aeronautic and industrial application. Though revenue is expected to lag in 2012, the Street expects around a 10 percent increase in 2013 revenues that, along with improved margins driven by consistent earnings generation, will make the company more investment-friendly.
So Burbank's approach in a nutshell: shy away from equities, buy physical commodities, and look for holdings that generate alpha independently of broader economic conditions.
This article is written by Brian Tracz and edited by Meena Krishnamsetty. Both of them have long positions in PSX. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.