What’s Oaktree Capital Buying?

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At Insider Monkey, we track 500 of the world’s most elite hedge funds, and Howard Marks' Oaktree Capital Management is one of the best of the best. Based in Los Angeles, Oaktree specializes in distressed debt, corporate debt and convertible securities, with an eye for contrarian, lesser-known investments. Because it can pay to watch hedge fund sentiment—discover why here—we’re going to take a look at Oaktree’s favorite picks heading into this quarter.

Number one

In Oaktree’s first quarter 13F filing with the SEC, its largest equity holding was in First BanCorp (NYSE: FBP), worth approximately $315.8 million. In Oaktree’s Q4 filing, the fund held the same number of shares in First Bancorp, but the stake was valued at $232.1 million. Up more than 34% year-to-date, shares of the bank holding company have benefited from above-average gross margins (89.0%) and solid revenue growth.

First Bancorp expects to come in this quarter with a $60+ million write-down related to Lehman Brothers, but shareholders are still optimistic on its ability to recover in Puerto Rico while expanding in Florida. At 5.6 times forward earnings and a book multiple below parity, there’s clear value here that Oaktree is betting on.

Natural gas play

The second-largest equity listed in the fund’s 13F portfolio is EXCO Resources (NYSE: XCO), worth $262.2 million, up from $249 million reported at the end of last year. Up close to 19% since the start of 2013, Exco has been another good investment for Oaktree. The energy company’s latest earnings weren’t remarkable, but they were solid enough. Exco beat the Street’s estimates by $0.05 (EPS), and this is a play on higher natural-gas prices in the future. Exco has a major presence in the shale gas arena, particularly in East Texas and North Louisiana.

Unlike some of its peers, which have been shedding assets, Exco has been building its resource base, establishing one key partnership with Harbinger earlier this year. At 22 times forward earnings, shares aren’t overwhelmingly cheap, but a dividend yield of 2.5% is enough to tide Oaktree over until higher LNG prices hit over the next few years.

Momentum play

Charter Communications (NASDAQ: CHTR) is the next on the list with the fund holding 2 million shares worth a total of $208.4 million. The stock is up 49.5% year-to-date. Much of the impetus behind this cable servicer has been due to its very impressive first-quarter earnings report, in which an EPS of $0.03 beat consensus by $0.48.

Higher data speeds and a much improved triple-play (premium bundle) sell-in rate—that skyrocketed by 75%—were key factors behind this beat, and the company’s plans for a cloud-centric user interface in the intermediate-term has investors optimistic. This isn’t a value play, but it would be foolish to ignore the momentum; Wall Street’s most bullish analysts expect shares to rise another 28% from current levels.

The best of the rest

The fund also reported owning 4 million shares of Delphi Automotive (NYSE: DLPH), worth $177.6 million, down from 6.4 million shares, worth $244.8 million, in the prior quarter. The vehicle-parts manufacturer is a play on a rebounding global economy—particularly Europe—and it’s for investors who aren’t too enthusiastic about automakers like GM or Ford. Delphi, interestingly, is attractive from both a value and a growth standpoint, with the sell-side predicting EPS growth of 22% this year. Shares trade at a measly forward P/E of 9.9 and a PEG near 1.0; it’s easy to see why Oaktree is bullish.

Dynegy closes out the fund’s top-five equity holdings. According to the 13F, Oaktree Capital held a stake of 7.2 million shares, worth $173.3 million in the coal and gas electric company. The size of the holding was consistent with the end of 2012, with the value of the stake rising from $138.2 million.

Dynegy has one of the highest year-to-date returns amongst power-production companies at 23.4%, versus an industry average of 10.3%. A recent completion of a $500 million senior-note offering is a positive sign for its bottom line. With losses in its last three quarters, Dynegy is understandably cheap at 2.3 times sales and 2.8 times book, and Oaktree is likely playing this stock as a value bet.

Final comments

Unlike many of its peers, Oaktree Capital holds a range of equities in its top five, each with their own unique bullish theses moving forward. Dynegy, Delphi and First Bancorp are obvious value opportunities, while Charter Communications is a steamroller that has rewarded its investors handsomely of late and looks set to continue to do so moving forward. Exco Resources isn’t particularly cheap and doesn’t sport insane momentum, but it should benefit from natural-gas appreciation in the next couple of years, and it is an intriguing shale play for 2014 and beyond.

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This article is written by Alex Oleinic 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 has no position in any of the stocks mentioned. 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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