5 Stock Picks from Gates Capital Management
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Jeffrey Gates founded Gates Capital Management in 1996 after a career researching and selling high-yield bonds and currently serves as the fund’s portfolio manager. Gates is an event-driven investor who seeks to identify “dislocation events” at public companies that create cash flow and sustainable value. Read on for analysis of five of the fund’s top holdings.
Gates reported owning 2 million shares of Nortek (NASDAQ: NTK), the fund’s largest position. Nortek provides building products such as ventilation devices (including kitchen range hoods and air exchangers), audio/video equipment, and air conditioners. Nortek IPO’d in November 2011 and has been doing quite a bit better than many other recent IPOs: the stock is up 159% in the 10 months since the company went public. However, this rise in the price may have outpaced Nortek’s business as it now trades at 56 times trailing earnings.
Another of Gates’ top picks was tool and diagnostics device company Snap-on (NYSE: SNA). The fund increased its position in Snap-On by 26% during the second quarter, growing its position to 1.4 million shares. Snap-On’s recent performance hasn’t been quite as good as Nortek’s, but the stock is still up about 60% over the last year (easily beating the broader market) despite the fact that its revenue and earnings are tracking about the same as a year ago. Snap-On trades at a trailing P/E multiple of 15 and a forward P/E multiple of 13, and so may still be a good value.
Darling International (NYSE: DAR) is a $2.1 billion company that renders animal remains and cooking oil into food recovery products and also processes excess baked goods into animal feed. Despite the growth of the restaurant industry, Darling saw a 7% decline in revenue and a 31% drop in earnings in the second quarter compared to the same period in 2011. Gates increased its stake in the company by 54% compared to the end of March and now owns 5.4 million shares; the fund may be attracted to Darling’s solid valuation metrics as the stock trades at 16 times trailing earnings and only 12 times forward earnings estimates. We think investors should look at this stock more closely.
DaVita (NYSE: DVA) picked up a lot of interest from notable investors last quarter according to our 13F database; Warren Buffett’s Berkshire Hathaway increased its own position by 55%. Gates got there early: it actually slightly reduced its holdings in the second quarter, though it still closed June with about 810,000 shares of DaVita in its portfolio. DaVita operates dialysis centers for patients whose kidneys are failing. It is also a borderline value stock with both its trailing and forward earnings multiples in the teens.
Gates reported 1.6 million shares of The McGraw-Hill Companies (NYSE: MHFI) in its portfolio, which represented a 77% increase from the end of the first quarter. McGraw-Hill, which also owns the Standard & Poor’s business of providing credit ratings and financial research products, had a pretty flat performance last quarter versus a year ago. The company plans to split in two in the next several months, allowing its education and financial products to operate independently. McGraw-Hill is valued at $15.3 billion, which represents a trailing P/E multiple of 17.
This article is written by Matt Doiron 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 Darling International and The McGraw-Hill Companies. Motley Fool newsletter services recommend Darling International. 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.