Fortress Investment Group’s Top Stock Picks
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Fortress Investment Group started out as a private equity firm in 1998, founded by Wesley Edens (a former partner at BlackRock Financial), Robert Kauffman (a managing director of UBS) and Randal Nardone (another managing director of UBS). Fortress has four core businesses: private equity, credit, liquid markets and traditional asset management. The firm has been successful with taking portfolio companies public, including Aircastle, Brookdale Senior Living and RailAmerica. After reviewing Fortress' latest 13F, an SEC filing that reveals the majority of the firm's publicly owned securities, we have outlined its top five holdings (check out Fortress' entire 13F portfolio here).
Nationstar Mortgage Holdings (NYSE: NSM) is Fortress' number one stock pick, with over 50% of the firm's 3Q 2012 13F portfolio invested in the stock. Fortress purchased Nationstar in 2006 and took the company public this past March. The loan service company operates throughout the U.S. with a focus on agency and government residential mortgage loans. The stock is already up 25% year to date in 2013, driven by the announcement that it will acquire $215 billion in mortgage servicing rights (MSRs) from Bank Of America. Nationstar plans to pay $1.3 billion for the MSRs.
The transaction will add 1.3 million customers to the company's 1.2 million base. Fitch Ratings is now monitoring Nationstar to see how the MSRs from Bank of America will be integrated. Worth noting is that Fitch does not expected the recent transactions to impact the loan servicer's ratings. The snatching up of MSRs is something Fortress has been advocating since early 2012 when it launched a private equity firm to focus solely on the rights. In early 2012, Wes Edens, head of private equity at Fortress had this to say during an earnings call about MSRs:
“In the U.S., the regulatory drumbeat continues...there is going to be a flight of businesses and assets out of regulated financial institutions into non-regulated. We see that certainly in the mortgage-servicing rights."
As of its last 13F filing, RailAmerica was officially Fortress' second largest holding, and was acquired by the firm in 2007. As a publicly traded entity, the stock is now currently defunct after RA's operations were sold to Genesee & Wyoming last year. The deal was actually completed on Oct. 1, one day after the Q3 filing period ended, which explains why the holding is still listed.
Let's move on to the remaining four stocks in Fortress' top picks that are actively traded.
Brookdale Senior Living (NYSE: BKD) is Fortress' next largest holding and is worth 10% of its 13F holdings. Fortress took Brookdale public in 2005 and now the company is the largest provider of senior living facilities in the U.S. Brookdale should see interim pressure thanks to heavy investment in turning around under-performing facilities, but an expected rise in occupancy over the longer-term should help drive Brookdale's future growth.
Occupancy rates are performing well, reaching an average of 88% as of 3Q 2012, up 60 basis points year over year. The senior living company also plans to grow its footprint by making key acquisitions. Billionaire Ken Griffin of Citadel Investment Group had different feelings about Brookdale, though, selling off over 90% of his shares in 3Q (check out Ken Griffin's newest picks).
American International Group (NYSE: AIG) was a new position for Fortress during 3Q 2012 and made up the firm's next largest 13F holding. AIG received about $125 billion from the Federal Government, and in December 2012 the Treasury sold its last shares for a total profit of $22.7 billion. Helping fund the remaining debt payoff was AIG's sale of 90% of its airline leasing segment and the remaining stake of its Asian life insurance segment.
The insurer is now streamlining operations to better focus on its property-casualty and life insurance businesses. Earlier this month, AIG was reported to be considering the possibility of joining a $25 billion shareholder lawsuit led by former CEO Hank Greenberg. The suit alleges that the bailout cost shareholders billions of dollars, but the Board has since decided not to participate. On a P/B basis, AIG appears cheap at only 0.6 times book. Additionally, at the end of its last quarter's financials, shareholders' equity came in at $65 per share, but the stock trades at only $35.
SeaCube Container Leasing (NYSE: BOX) makes up 3.7% of Fortress' 13F portfolio. The container-leasing company leases refrigerated containers, dry freight containers and generator sets. SeaCube does trade in line with many of the other transportation and leasing companies at 8.5x earnings but should see positive growth as the industry rises on the back of global growth.
The real appeal for investors should be its 6.2% dividend yield. SeaCube's annual dividend payout is only $24 million, and it managed to generate some $250 million in operating cash flow over the last twelve months, while having close to $50 million in cash on hand. The container company is a small-cap stock that gets little attention from hedge funds but could provide investors with solid income. Billionaire Jim Simons is one of the big-name SeaCube investors (check out Jim Simons' top picks).
Walker & Dunlop (NYSE: WD) is another top pick of Fortress' and is worth 2% of its 3Q 13F portfolio. Walker provides commercial real estate financial services in the U.S., with a focus on multifamily properties. Walker also offers service loans for life insurance companies and commercial banks. This is another stock with little love from hedge funds, which is in part because it operates in what has been an unsexy industry over the last few years.
Recent news, however, put the stock up close to 2.5% last week after an announcement that 2012 loan origination volume was up over 75% from one year earlier. The increase was in large part thanks to its acquisition of CWCapital. Walker is up over 40% since its early September acquisition closing. Based on a forward P/E of 8.4x and a 5-year expected EPS CAGR of 8%, Walker could make for a solid 'growth at a reasonable price' investment, with a PEG of 1.1.
To recap: Many of Fortress' top picks are relatively unknown, and Nationstar and Walker & Dunlop give the fund good exposure to real estate. Brookdale is an interesting play on an aging population, and AIG appears to be undervalued. Seacube is a high dividend paying small-cap stock that is also reasonably priced at 8.5x earnings, versus top competitor TAL International Group (10x).
This article is written by Marshall Hargrave and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. 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!