Why Did This Hedge Fund Buy J.C. Penney Last Quarter?
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Glenview Capital recently filed its 3Q 13F with the SEC, revealing some shakeups in its top investments and also showing strong conviction in various industries. Larry Robbins founded Glenview Capital in 2001 following a stint at Leon Cooperman's Omega Advisors. Between 2001 and 2010, Robbins returned a net 300%. We have identified five key moves that Glenview made during 3Q; these were made across a variety of industries and on the whole, were bets on a rebounding auto industry and a positive outcome from the healthcare reform.
Tenet Healthcare (NYSE: THC) saw an 18% increase in shares owned by Glenview during 3Q, moving the healthcare company from its 8th largest 13F holding to 2nd. Tenet is expected to see 2012 revenues up 3.8% and 2013 top line up 4.5%. The hospital operator has seen weakness due to uncertainties over its payer mix, which has been hit with a rise of less profitable Medicare and Medicaid segments. One of the company's key drivers going forward will be acquisitions. Tenet expects to make upwards of $400 million in acquisitions over the near term, including the purchase of InforMed Health Care Solutions. Over the long term, a rising population will lead to more hospital visits and more insured Americans, and a healthcare reform act will also promote business.
McKesson (NYSE: MCK) went from the 8th largest 13F holding in 2Q to 4th after an 88% increase in shares owned by Glenview. McKesson now makes up 4.9% of the fund's 13F portfolio. The pharma supply company is expecting modest growth on the back of various patent expirations that should boost generic drug volume. McKesson currently trades in line on a P/E basis at 14x, with one of its key competitors AmerisourceBergen. The leg up for McKesson should be its diverse product mix, including drugs, medical supplies and info tech. The pharma focused company is expected to grow EPS by 12% annually over the next five years, fueled by a drug supply contract via the Veterans Administration that should generate total sales of $31.6 billion through 2020.
J.C. Penney (NYSE: JCP) was Glenview's most notable new position in 3Q, making up 1.7% of its 3Q 13F. Penney is down over 50% year to date and showed signs of more struggles in its most recent quarterly results, with store traffic declining to a level that was lower than expected. Slowing traffic and declining comp sales are expected to continue in the interim, with same store sales expected to be down another 20% in 2013, and then in the low single digits in 2014. The restructuring may pay off in the long run, but investors are punishing the stock for current losses. The turnaround will likely take several years and holds a large amount of execution risk. Billionaire Bill Ackman continues to go to bat for J.C. Penney.
After a 44% increase in shares in 2Q, then a 41% increase in 3Q, General Motors (NYSE: GM) now makes up the 27th largest 13F Glenview holding. GM and other auto makers are expected to see a rebound in auto sales due to a strengthening U.S. market and other non-European regions. Driving the U.S. rebound will be sales of light vehicles, expected to be up 13% in 2012. Stacking GM up against its biggest competitor Ford, GM does trade much higher on a P/E basis at 9x, compared to 3x. What separates the two is their five-year expected growth rates, with GM expected to grow at 11%, while Ford only 5%. General Motors is one of the top 10 stocks loved by hedge funds in 3Q.
Sirius XM Radio (NASDAQ: SIRI) was a new addition to the Glenview portfolio in 2Q and the 32nd largest 13F holding. Following an almost 50% boost in shares owned during 3Q, Sirius is now the 24th largest 13F holding. The nice thing about Sirius is that it has largely avoided the influx of music services that are hitting the Internet and mobile industry, as it primarily deals with music service for autos. 3Q numbers showed Sirius adding almost 500,000 subscribers, boosting sales and leading to expected full year sales growth of 13%. We are encouraged by the rebound in the auto industry, which will help drive the 25% expected EPS growth over the next five years, but remain cautious over the Liberty Media takeover attempt; there is still uncertainty as to whether Liberty would change the company's strategy. Billionaire Steven Cohen was also betting on Sirius in 3Q.
We see value in almost all of Glenview's picks, including McKesson and Sirius, which both have strongholds on their respective markets. We also like Tenet's prospects given an aging population and healthcare reform, which should be long term positives for the company. We would rather hold off on J.C. Penney; although the stock looks cheap it will not see significant improvements for a couple of years. Meanwhile, GM has interesting prospects that could push it higher in the near term, including the sale of Treasury stakes that could boost its cash position and lead to capital returned to shareholders.
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 has no positions in the stocks mentioned above. Motley Fool newsletter services recommend General Motors Company, McKesson, and Tenet Healthcare. 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!