Hedge Fund Y/Cap Management’s Top Picks

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Y/Cap Management is a business unit of Yield Capital Partners, which was founded by Richard Haydon in 2009. As might be inferred from the name of its parent, Y/Cap often invests in income stocks on the theory that structural factors in the market will lead to return on equities coming predominantly in the form of dividends as opposed to capital gains. The fund has also taken large positions on bonds in the past. Haydon had previously worked as a portfolio manager at Neuberger Bergman and at billionaire Leon Cooperman’s Omega Advisors.

In April, Y/Cap filed its 13F with the SEC, disclosing many of its long equity positions as of the end of March. From now on, we will be adding Y/Cap to our database of 13F filers whose holdings we use to develop investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year. We can also see individual stocks which Haydon likes. Here are Y/Cap’s five largest holdings from the 13F.

The fund owned about 360,000 shares of Seadrill (NYSE: SDRL) at the end of the first quarter of 2013. It’s easy to see what an income investor would like about Seadrill: while the specific amount of dividend payments has fluctuated, the stock looks to pay at least $0.75 per share each quarter, which would make for a yield of 7.5% (with higher payments more recently). Wall Street analysts also like the offshore drilling company, with earnings estimates implying a forward P/E of 11 and a five-year PEG ratio of 0.4.

Another energy stock with a high current yield is BP (NYSE: BP), in which Y/Cap disclosed ownership of about 290,000 shares in the filing. At current prices and dividend levels, BP’s yield is about 5%. The oil major is also arguably a value play, trading at 8 times forward earnings estimates (though this isn’t too much lower than many other large oil companies). BP made our list of the most popular energy stocks among hedge funds in the fourth quarter of 2012 (find more energy stocks hedge funds loved).

Frontier Communications (NASDAQ: FTR) was another of Haydon’s top stock picks. Frontier is a $4 billion market cap telecommunications company whose yield at present is almost 10%; however, the company has been reducing its dividend payments significantly over the last couple of years. Despite the high yield, 23% of the float is held short as more value-oriented investors balk at the high earnings multiples, and at the fact that revenue and earnings have been down at Frontier.

Y/Cap reported a position of almost 240,000 shares in Freeport-McMoRan Copper & Gold (NYSE: FCX). The company’s stock price had fallen in December after it announced an acquisition of two oil and gas exploration and production companies, and combined with a questionable macro situation (copper is often thought of as a barometer of the global economy) the stock is now down 12% in the last year against a market which is up 20%. There’s also a decent dividend yield here, at 4%.

Haydon and his team had about 160,000 shares of Realogy (NYSE: RLGY), a $7.4 billion market cap operator and franchiser of real estate brokerages, in their portfolio at the beginning of April. The company, which counts Coldwell Banker and Century 21 among its brands, has been unprofitable in the past couple of quarters. Analyst consensus for 2014 values the stock at a forward P/E of 20, despite the fact that revenue grew only 9% last quarter compared to the first quarter of 2012.

We’d recommend avoiding Realogy, and while Frontier does have an attractive dividend yield, it might be safer to look at larger telecoms, even those which are less generous on the income front. We aren’t a fan of Freeport-McMoRan’s acquisition plans, but will acknowledge that it’s possible that the market has already accounted for any integration risks or other factors which could destroy shareholder value. BP and Seadrill complement their dividends by being somewhat cheap (at least in the context of potential growth in Seadrill’s case) and look worthy of further research.

After putting together a blockbuster deal to expand into the oil and natural gas industry, Freeport-McMoRan will have plenty on its plate as it tries to adapt to the new industry, as expanding into oil and gas carries plenty of inherent volatility. FCX had a profitable copper business, and on top of this foray into a new industry it still has to contend with mining industry bellwether BHP Billiton. To help investors determine if Freeport-McMoRan is a buy or a sell, The Motley Fool has compiled a premium research report on the company. Simply click here now to access your copy today.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in FTR. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold and Seadrill. 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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