Why is This Hedge Fund Manager so Bullish on the U.S. Economy?
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John Burbank's Passport Capital is the San Francisco-based investment firm that Burbank founded in 2000. Passport uses a 'major themes' and macroeconomic analysis approach. Burbank's flagship fund returned 219% in 2007 thanks to big bets against the housing market, and then in 2010 he outpaced the S&P 500 with an 18.3% return. Burbank is famed for having been one of the oracles of the sub-prime crisis, so let's see what he is predicting now.
Passport recently released its 13F for the third quarter, and from that we get the sense that the fund is seeing value in a variety of industries, including tech and gold. One of the overwhelming themes we also noticed was Passport's relative bullishness on a global economic outlook, including industrials and manufacturing. Passport did quite the moving and shaking during 3Q, doubling at least thirteen of its positions and adding over forty new positions.
Two of the notable moves that caught our eye were Passport's big ramp up in tech companies Google (NASDAQ: GOOG) and eBay (NASDAQ: EBAY). During the third quarter, Passport increased its Google holdings by over 200%. Google is now Passport's 13th largest holding in its 13F portfolio. While Passport was jumping head first into Google, one other big-name fund downsized their Google position in 3Q - RenTech.
Google posted disappointing 3Q results, which has driven the stock down over 10% in the past month. Besides the operating loss posted by its Motorola Mobility segment, Google's results were not as dismal as the stock's tumble would warrant. As always, the search giant has some key growth prospects as major advertising dollars continue to shift to the Internet and away from print. Google has a stronghold on the search industry, owning over 65% of the U.S. search market, and should be able to benefit the most from this fundamental transfer. The search giant is trading at 21x trailing earnings, but only 14x forward earnings, whereas its historical P/E is around 25x.
The size of Passport's eBay stake jumped 70% in 3Q, and now makes up over 3% of the fund's 13F. eBay has managed to beat earnings for the last four quarters and shows promising growth going forward. PayPal is expected to offer consumers the ability to pay with the platform in certain physical retail locations by next year. We see the main driving force for eBay and PayPal being the transition to mobile payments and mobile commerce. eBay trades at only 18x earnings, while its main competitor Amazon trades at over 100x earnings. See if eBay is a better buy than Amazon.
Passport appears to be overly bullish on the chemical product manufacturer Huntsman Corporation (NYSE: HUN). Passport increased its shares of Huntsman over 200%, making it the fund's 2nd largest holding, worth 7.2% of their 3Q 13F portfolio. The boost in Huntsman shares is just one of the reasons we believe that Passport is optimistic about the global economy.
Passport made notable investments in many other key bellwether companies, including Domtar (paper and paper products, increased shares 175%), CONSOL Energy (industrial mining, a new position), and Nucor (iron and steel, a new position). Huntsman is a special situation turnaround, having begun the restructuring of its textile effects business in 2011. This includes the closure of various production facilities. The chemical company is now performing better than expected, posting 3Q operating EPS of $0.70 compared to $0.45 during the same period last year, and beating estimates of $0.51. Check out our detailed earnings analysis. Huntsman still appears to be trading cheaply when compared to other major chemical companies Dow, Eastman and DuPont. Huntsman trades at 8x trailing earnings, but the other three all trade at P/E ratios above 13x.
Kinross Gold (NYSE: KGC) is another company that Passport has found a reason to get excited about. We believe the Fed's plans to keep rates near zero for the next few years, and the vast amount of global uncertainty is a near term positive for gold and should lead to an ascension in gold prices. Kinross is one of our top five stocks to buy as gold moves higher. Passport's increase in Kinross shares was north of 450% during 3Q, and now makes up 4.3% of Passport's 13F, good for their fourth largest holding.
Despite three quarters of negative earnings, Kinross broke this streak by posting 3Q results of $0.22 EPS and beating estimates by 15%. The gold producer expects to meet its 2012 gold production forecast, but still trades at less than 9x forward earnings. Comparing this to major competitors Eldorado Gold (33x trailing) and Randgold (22x trailing), Kinross appears to have more room to run.
The notable new addition to Passport's 13F portfolio was Las Vegas Sands (NYSE: LVS). Passport bought over 1.1 million shares during 3Q, making this new position Passport's tenth largest 13F holding, right behind Las Vegas Sands' rival Wynn at ninth. While Passport was getting into Las Vegas Sands, it was reducing its 2Q Wynn position by over 25% during 3Q. When looking at Las Vegas Sands it appears they might trade on the high side on a valuation basis, trading at 24x, compared to Penn National Gaming (17x) and Wynn Resorts (20x), but then we look at the company's industry-leading expected growth rate and the premium is justified. Las Vegas Sands is expected to grow earnings by 22% annually over the next five years. Growth will be drive by its Macau and Singapore locations, where Macau gaming revenues were up 42% in 2011.
Overall we see Passport as being bullish on a global economic rebound and a return to discretionary spending. The two tech companies that Passport took an interest in will be driven higher by fundamental shifts in consumer preference (shift to mobile) and technological innovation (Internet advertising and mobile payments). The story for Huntsman is driven by a return to global manufacturing, while Las Vegas Sands will benefit from consumers loosening their pocket books.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend eBay and Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!