A Large Multi-Strategy Hedge Fund’s Latest Stock Picks
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HBK Investments, managed by David Haley, was founded in 1991 and acts as a multi-strategy hedge fund which pursues arbitrage and absolute return strategies. The financial crisis hit the fund hard as low performance and redemptions cut its assets under management in half. However, HBK generated good returns in 2010. Haley has a law background, with a degree from Southern Methodist University and experience as a corporate and securities lawyer. Many of the fund’s largest investments are in corporate debt but the fund invests in equities as well. We have gone through the fund’s 13F filing for the second quarter of 2012, in which it publicly disclosed many of its positions as of the end of June. Learn more about the fund's holdings or continue reading for our quick take on some of the stocks that it owns.
Many of HBK’s largest stock positions were companies in the process of being acquired, suggesting that the fund aggressively pursues merger arbitrage opportunities. Hedge funds like to invest in merger arbitrage because they provide uncorrelated returns; the profits or losses from investing in a company set to be acquired generally are independent of market movements. Read more about hedge fund merger arbitrage strategies. One merger target which has not yet closed is software company Ariba, Inc. (NASDAQ: ARBA). The company is set to be acquired by SAP for $45 per share and currently trades at $44.76, though federal regulators must still approve the deal.
Setting aside merger arb plays, the fund’s largest stock position disclosed on the 13F was its 1 million shares of Owens Corning (NYSE: OC). As a composites and building materials company, Owens Corning is tied to the broader economy (beta of 1.7) and to housing activity, which some commentators argue is beginning to rebound. The company itself saw declines in revenue and earnings last quarter compared to a year ago, but the Street expects strong growth next year as Owens Corning’s forward P/E multiple of 13 compares quite favorably to its trailing earnings multiple of 24. The stock is up 54% over the last year, about doubling the S&P 500’s performance.
Time Warner Cable Inc (NYSE: TWC) was another of the fund’s stock picks as it owned 350,000 shares at the end of June. Time Warner Cable, whose market capitalization is a bit under $30 billion, offers cable, Internet, and phone service to residential and business customers. It showed moderate growth in the second quarter of 2012, with earnings up 8% over the same period in 2011. The stock trades at 17 times trailing earnings, which sounds about right for a slow-growing stock with a dividend yield of 2.3%. John Shapiro’s Chieftain Capital was another hedge fund owning the stock at the end of the second quarter.
The fund increased its stake in $2.1 billion market cap ultra-deepwater driller Pacific Drilling SA (NYSE: PACD) by 19% to a total of 3.3 million shares. Pacific Drilling is staffing up in anticipation of high demand for its services: it has three currently operating drillships, three more on the way to market, and one on order from a shipyard. The company then contracts its services on a dayrate. Investors are excited about its future prospects, as even on a forward basis its earnings multiple comes in at a fairly high 21. We also think it is possible that demand of deepwater drilling will be more slack than the company is depending on as cheaper onshore production continues to boom.
HBK only owned about 40,000 shares of Priceline.com Inc (NASDAQ: PCLN), but the stock’s high per-share price made it another of the fund’s largest equity positions disclosed on the 13F, at least after excluding some merger arb plays (including those which have already closed). Priceline continues to grow its business despite its large size: its revenue and earnings were up over 20% in its most recent quarter versus the same period last year. It trades at 26 times trailing earnings, but expected future growth brings it down to 17 times forward earnings estimates.
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 Priceline.com. Motley Fool newsletter services recommend Priceline.com. 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.