A Few Top Stock Picks From This Multi-Billion Dollar Fund
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Mason Hawkins founded Southeastern Asset Management in 1975 and tends to invest for the long-term, not worried by the interim ups and downs of the markets. His firm remains employee-owned and manages roughly $32 billion in assets. In reviewing Southeastern’s most recent 13F – which reveals the majority of the firm’s publicly traded equity holdings – we have outlined its top five stock picks (check out the rest of Southeastern’s 13F portfolio).
Chesapeake Energy Corporation (NYSE: CHK) is Southeastern's top 13F holding, with 7.3% of the firm's 13F invested in the energy company. Over the next few years, Chesapeake hopes to transition from a gas producer to a liquids producer. As of the third quarter, Chesapeake had cut its gas rigs to 9 - compared to 75 in 2011, and now runs almost 100 liquid rigs. Chesapeake's 25/25 plan includes targeting debt reduction of 25% through 2013, but unfortunately, the oil and gas company is going in the opposite direction, having increased its long-term debt by 50% over the past year.
Chesapeake has built up a solid asset base, which in part accounts for its $15.7 billion in long-term debt, but the company is still burning cash on CapEx, having spent $9.4 billion through 3Q, which is well above its estimated $8.5 billion for the full year of 2012. Obviously, high debt levels and overly aggressive CapEx gives us reason for concern. For the time being, the oil and gas company is still paying its nine-cent quarterly dividend, which is a $240 million annual payout, but Chesapeake had only $140 million in cash as of 3Q. Billionaire Carl Icahn is alongside Southeastern in Chesapeake (check out Carl Icahn's big bets).
Loews Corporation (NYSE: L) is Southeastern's second largest 13F holding and is not your typical property and casualty insurance company, operating a number of other businesses, including a string of hotels. Per Loews' 3Q 13F (which they file since they own 90% of CNA Financial), the company's big investments include CNA, Boardwalk Pipeline Partners and Diamond Offshore Drilling. Aside from its majority stake in CNA, Loews' ownership of its subsidiaries include a 50% ownership of Diamond Offshore and 60% of Boardwalk Pipeline Partners.
The majority of the company's revenues - 70% for the first nine months of 2012 - come from CNA. Part of what will continue to put pressure on Loews is its vast exposure to the insurance market, where a low interest rate environment is putting pressure on investment income. With no perfect competitors it is tough to value Loews. On a P/E basis, it trades well above its insurance peers at 19x earnings, compared to Chubb (11x) and Travelers (10x). On a book value basis, Loews' stock trades at only $41.98 compared to its tangible book value of $50.
What about the rest of Mason Hawkins' top picks?
DirecTV (NASDAQ: DTV) is Southeastern's 3rd largest 13F holding and makes up 6.1% of the firm's 13F portfolio. DirecTV's stock underperformed top competitor Dish Network by almost ten percentage points in 2012 and trades at a 40% discount on a P/E basis to Dish's at 13x earnings. Despite a 2Q 2012 quarter that showed DirecTV posting its first ever subscriber loss, total subscriber additions is expected to come in at 4 million for 2013, and put total U.S. customers to over 20 million.
DirecTV's robust growth is from the Latin American market - driving revenues up 7% in 2013 - and higher margins thanks to higher pricing in the U.S. Interestingly, Warren Buffett is the top fund owner among those we track (see Warren Buffett's newest picks).
FedEx (NYSE: FDX) is 6.1% of Southeastern's 13F portfolio. FedEx saw Southeastern increase its stake by 30% last quarter, which is a vote of confidence for the global delivery economy. The transport company is a major economic bellwether that expects revenues to be up 4% in FY2013 after being up 9% in FY2012. Helping drive this revenue boost should be its Ground segment - expected to see revenue up 8% in FY2013. The transport company's cost savings should help further drive FedEx's profit margins higher, where its gross margin is already at 25%, compared to UPS' 15%.
FedEx trades well below top rival UPS at 0.7x sales and 15x earnings, compared to UPS' 1.4x sales and 22x earnings, and might be the best play in the transport industry.
Aon (NYSE: AON) is Southeastern's 5th largest 13F holding and has been seeing solid revenue gains driven by its 2010 acquisition of Hewitt Associates - revenues were up 33% in 2011. The global risk manager and insurer now has one of the world's leading human resource consulting and outsourcing segments. The heavier weighting toward the human resource business should pressure performance in the interim though, thanks to high unemployment and slow hiring practices.
Aon trades at 2x book value and is in line with its peers at 20x earnings, whereas Arthur Gallagher and Brown & Brown also trade at 20x earnings. Although Mason loves Aon, billionaire Ken Griffin - founder of Citadel Investment Group - dumped almost 90% of his shares in 3Q.
To recap: it appears that Mason Hawkins and Southeastern Asset Management have made solid investments in the insurance industry, which include Loews and Aon. It also appears that Hawkins is betting on a better global economy as evident by his FedEx bet, and is standing by Icahn in Chesapeake.
This article is written by Marshall Hargrave and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Meena has a long position in CHK. The Motley Fool recommends Aon Corp, FedEx, and Loews Corp. The Motley Fool owns shares of Aon Corp and Loews Corp and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. 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!