$4 Billion Hedge Fund Pine River Capital’s Top Stock Picks

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We have been keeping track of 13F filings from hedge funds and other notable investors for the fourth quarter of 2012, which are due this week. 13Fs disclose many of these funds’ long equity positions in U.S. stocks as of the end of the quarter. We compile these holdings in our database and work to develop investment strategies based on the raw data; the most popular small cap stocks among hedge funds, which we named in our August newsletter, outperformed the S&P 500 by 18 percentage points between September and January (see more of the details). We also like to go through 13Fs to see what a fund manager would recommend to the broader investment community; we provide a brief overview of top picks so that investors can perform more research if they are interested. Read on for our take on five of Pine River Capital Management (a $4 billion hedge fund managed by Brian Taylor)’s largest holdings and compare them to previous filings.

One of Pine River’s largest equity holdings on the 13F was Annaly Capital Management (NYSE: NLY), a popular real estate investment trust. Real estate investment trusts are required to distribute much of their income to shareholders in order to preserve their tax status; in the case of Annaly this has resulted in a dividend yield of over 10% going by recent dividend payments. Perhaps unsurprisingly, it is widely followed among income investors. We would note that dividend payments have been trending downward, and also that Annaly primarily invests in mortgage-backed securities and other real estate loans.

Taylor and his team cut their stake in Ocwen Financial Corporation (NYSE: OCN), but thanks to a strong performance in the stock price the $5.7 billion market cap loan servicing company still occupied a prime place in the fund’s portfolio. Ocwen is up over 160% in the last year, roughly matching the increase in net income over the same period. At a trailing P/E of 45, the stock is priced for further growth but the sell-side expects it to be achieved given the current-year P/E of only 9. Ocwen also does substantial business related to mortgage-backed securities, including subprime loans.

Pine River owned almost 3 million shares of American International Group (NYSE: AIG). AIG had been one of the most popular stocks among hedge funds in the third quarter of 2012 (check out the full top ten list) and it remains an appealing value stock at a price-to-book ratio of 0.6. While we do think that AIG should trade at a discount to the book value of its equity, we would find a narrower discount more appropriate. Analyst expectations for this year imply that AIG is valued at 11 times this year’s earnings, so the insurance company could be considered a good value from that perspective as well.

Nexen (NYSE: NXY), an energy company with a focus on producing oil from Canada’s tar sands but with other operations around the world, was another of Pine River’s top picks. Nexen is in the process of being acquired by Chinese oil company CNOOC, with both U.S. and Canadian regulators approving of the deal. The takeover price is set for $27.50, with the stock currently trading at prices of just above $27.40. As such the opportunities for merger arbitrage are limited.

The fund reported a position of 8.2 million shares in CYS Investments (NYSE: CYS), another REIT. As is common with these stocks, CYS makes substantial dividend payments (though it appears to have made a special payment in December) and we would estimate the yield based on historical distributions to be at least 13%. However, a number of market players have been bearish on CYS. The stock has fallen 9% in the last year against a rising market, and the most recent data has 14% of the outstanding shares held short. As a result income investors should be cautious rather than buying for the yield alone.


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 recommends American International Group. The Motley Fool owns shares of American International Group and Annaly Capital Management 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!

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