Here’s Why Hedge Funds Love Rentech
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In today’s financial world, there aren’t many stocks that surprise investors, as there are millions upon millions of equity research reports available 24/7, at the click of a mouse. Okay, to call some of these analyses reports is a bit of a stretch, but you get the point. With the seemingly endless array of free analytical information out there, it’s easy to be a believer in the strong-form efficient market hypothesis these days. Now the chances are, if you’re reading this article, you probably aren’t a strong-form EMH bull through and through.
As demonstrated in our research, we aren’t either. In fact, various empirical studies on real-world indicators like hedge fund sentiment and insider trading activity have proven that the average Joe can outperform the market over the long run. Regarding the former metric, it’s always a good idea to consider how the world’s best money managers are valuing your favorite companies, but aggregate hedge fund activity can also be a good indicator of stocks that would be good additions to your portfolio. In this article, we are going to explore one such stock, which may be the best-kept secret on Wall Street.
Rentech, Inc. (NASDAQ: RTK)
Rentech is a U.S. company focused on the development and distribution of clean energy solutions, particularly carbon-based fuels derived from a number of feedstock inputs. As mentioned on the company’s website, these sources include: “forestry waste (bark, branches, waste wood, sawdust and stumps), agricultural waste (corn stover, straw and bagasse), green waste (lawn and tree clippings), algae and energy crops, […] petroleum coke, lignite, coal and natural gas.”
Rentech’s primary source of value is in its patented version of the Fischer-Tropsch (FT) conversion process, which involves using molten wax to convert carbon monoxide and helium molecules from their aforementioned inputs into hydrocarbons. Now, you don’t have to be a scientist to realize that hydrocarbons are what make the world turn, so to speak, at least from an energy standpoint. These organic compounds occur naturally in fossil fuels like methane, propane, butane, and petroleum, though Rentech can synthesize them with its FT system into a relatively clean source of fuel. In addition to its production of clean fuels, Rentech also has a nitrogen fertilizer plant in the Midwest.
In its most recent earnings release on August 10th, it was the company’s fertilizer business that had Rentech executives so giddy. The company reported that an abnormally high compost demand helped it reach earnings of $0.04 a share, while it increased year-ahead “guidance for cash available for distribution to more than $3.30 per unit – up from prior guidance of $2.86 per unit.” Likewise, lower than normal natural gas prices allowed the company’s gross margins to reach a whopping 65%, up from 50% at the same time last year.
To put this in perspective, other fertilizer producers like Potash Corp. Saskatchewan (NYSE: POT) at 47.1%, Agrium Inc. (NYSE: AGU) at 27.4%, CF Industries Holdings, Inc. (NYSE: CF) at 51.0%, and Intrepid Potash, Inc. (NYSE: IPI) at 39.8%, all are operating less efficiently. Rentech management “expect[s] the [U.S.] drought to continue to have favorable impact on nitrogen prices and the demand for the remainder of 2012 and ’13,” meaning that the company’s advantageous position is likely here to stay, at least for the next 12-16 months.
When looking at Rentech’s historical returns, it’s obvious that the markets have taken notice, but there may still be gains to be had. Since the start of 2012, shares of the company have returned 84.0%, above the likes of Potash Corp (3.6%), Agrium (52.8%), CF Industries (52.0%), Intrepid Potash (4.6%), and more diversified competitors like Sasol Limited (SSL) at 1.1%, and Syntroleum Corp (SYNM) at -11.5%.
From a valuation standpoint, however, Rentech trades at price-to-book and price-to-sales ratios that are 10-20% below their five-year averages, and a cash flow multiple (2.5X) that is at a major discount in relation to historical norms (13.3X) over the past half-decade.
In the hedge fund industry, it appears that managers are taking notice of Rentech. At the end of the second quarter of 2011, only three funds held long positions in the stock, with this number increasing to 14 just one year later. The trio of hedge funds that have held Rentech through the duration include D.E. Shaw, Ken Griffin, and Clint Coghill, with the latter holding the largest position in the stock, worth $11.4 million.
Other managers to jump on the bandwagon as of late include Steven Cohen, Jim Simons, and Israel Englander. Simons’ Renaissance Technologies has been most bullish of the bunch, reporting a 181% increase in its Rentech stake between Q1 and Q2 of this year. For a complete look at hedge funds’ sentiment toward this company, continue reading here. Due to Rentech’s appealing combination of solid growth prospects at an attractive price, this may be a good stock to consider adding to your portfolio as well.
This article is written by Jake Mann and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of CF Industries Holdings. 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.