Jeffrey Altman’s Owl Creek’s Top Picks
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Note: This article has been amended to better reflect the situation with CommonWealth REIT and Corvex Management. Motley Fool apologizes for the error.
In May, Jeffrey Altman’s Owl Creek Asset Management filed its quarterly 13F with the SEC, disclosing many of its long equity positions in U.S. stocks as of the end of March. Even though the information in 13Fs is a bit stale by the time these filings are released, we still believe there are a few ways for investors to make use of it.
For one, we’ve found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year and think that more strategies are possible as well. We also think that investors can treat picks from individual 13Fs as free investment ideas, performing research on any interesting suggestions from fund managers. Here are our thoughts on five of Owl Creek’s largest single-stock positions from its most recent 13F (or see the full list of the fund's stock picks):
Altman and his team owned 7.1 million shares of Yahoo! (NASDAQ: YHOO) at the end of the first quarter of 2013. New CEO Marissa Mayer has completed the company’s purchase of Tumblr, and with Yahoo! apparently a bidder for Hulu as well, it’s clear that she now plans to transform the Internet portal through acquisitions.
We would be concerned about valuation and integration risk, however. Billionaire Dan Loeb’s Third Point, which played a critical role in replacing Yahoo!’s former CEO with Mayer, had 62 million shares in its portfolio according to its own 13F (find Loeb's favorite stocks).
Hertz Global Holdings (NYSE: HTZ) was another of Owl Creek’s top picks; the filing disclosed ownership of 5.5 million shares of the equipment and auto rental company. With demand for construction and industrial equipment being dependent on macro factors, Hertz features a high beta of 2.8. The company’s revenue has been up, and Wall Street analysts are projecting strong gains in terms of earnings: the stock’s current valuation comes out to 10 times forward earnings estimates, with Hertz’s five-year PEG ratio being well below 1. We’re interested, though we’d warn that the stock is dependent on actually seeing higher earnings.
Another company which the fund likes and which the sell-side expects to improve considerably over the next year and a half is MetLife (NYSE: MET). At a market capitalization of $53 billion, MetLife is valued at only 8 times consensus earnings for 2014 and at a significant discount to the book value of its equity as well. Recent actual earnings numbers haven’t been particularly good, though revenue was up 9% in its last quarter compared to the first quarter of 2012. We’d note that MetLife is another high-beta stock.
Owl Creek initiated a position of 4.3 million shares in CommonWealth REIT (NYSE: CWH). The real estate investment trust -- which primarily invests in office and industrial buildings is going through arbitration with activist investor Corvex Management in concerns with Board members and Bylaws.
Corvex had been disappointed with the trustees’ lack of oversight regarding management. CommonWealth currently pays quarterly dividends of $0.25 per share, resulting in an annual yield of 4.3%; real estate investment trusts receive favorable tax treatment conditional on distributing a large share of taxable income to shareholders.
Altman had owned 2.6 million shares of Iron Mountain (NYSE: IRM) at the beginning of April. Iron Mountain plunged in early June after the company revealed that the IRS may revise its definition of “real estate” in a way that prevents it from converting to a REIT (since REITs are more tax efficient, markets had already partially bid up Iron Mountain’s stock price). Currently, the stock pays a dividend yield of 4% and could potentially be an income pick in any case, although its net margin has fallen recently.
As a result, both Iron Mountain and CommonWealth are possible picks for income investors, although we’d advise against concentrating too heavily on REITs. Hertz and MetLife are also interesting prospects from a value perspective, though with trailing earnings numbers not being that strong in either case, it would of course be important to investigate how these companies are expected to achieve impressive forward results before considering a purchase.
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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 owns shares of Hertz Global Holdings. 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!