4 Stocks from a Deep Value Investor
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In this article I analyze Hayman Advisors portfolio. Kyle Bass is the managing member and principal of Hayman Advisors, which he founded in late 2005 at Dallas. Hayman is a deep-value oriented hedge fund that specializes in recognizing distressed debt and special situations at the micro level. The fund holds a highly concentrated portfolio of just five equity positions. Be sure that every purchase was deeply analyzed.
I mentioned many times in my blog the importance to study what top hedge fund holds in their portfolios. Let’s review Hayman's current holdings:
Hayman holds 42% of its equity portfolio in Six Flags (NYSE: SIX). Hayman originally purchased a stake in Q3 2010 and the stock price has shot up nearly threefold since the purchase. There are several positives about this stock:
First, it has a shareholder-oriented management team. The company recently increased its quarterly dividend from $0.60 to $0.90, a clear indication that Six Flags is returning cash to investors. In addition, management has $82 million remaining from its $250 million buyback program, which was initiated in January 2012. I think that both the share buyback and strong dividend creates support for the stock. The stock currently yields 5.80% and management expects to keep improving the company's dividends.
Second, leverage improved considerably since Six Flags' bankruptcy. I like companies with limited or reduced debt with management teams committed to improve a company's leverages ratios. In fact, Six Flags has made a significant improvement to leverage, which stands at 2.2x in comparison to its pre-bankruptcy level of 9.7x.
Third, Six Flags continues to generate free cash. The company is expected to generate free cash flow of $230-$245 million in FY2012, and $250-$260 million in FY2013. Six Flags also has $281 million of cash on its balance sheet and a strong balance sheet.
In the last quarter Hayman initiated a position in Hyatt Hotels (NYSE: H). Hyatt trades at just 1.3x P/BV in comparison to Starwood Hotels' P/BV of 3.5x. I think that Hayman's bet should be related to the current valuation of Hyatt's real estate. This opportunity needs a deep valuation analysis because Hyatt could be a very interesting play considering the current strength in other hotel-related stocks (Marriott, Starwood, Wyndham) and how the whole real estate sector is recovering.
The hedge fund also bought Electronic Arts (NASDAQ: EA) at an average price of $13. EA declined 35% in 2012 and Hayman may think that decline was exaggerated. The stock trades at cheap multiples: a forward P/E of 11x, a PEG ratio of .73x and a P/S of just 1.05x. I like the secular trend of changing from packaged games to digital ones, such as downloads and online games on various platforms including mobile (tablets and smartphones). EA's management has the goal of delivering 40% of EA overall sales from the digital distributions channel. In fact, in the last earnings report, EA's digital net revenues grew 45% YoY to $314 million with each digital revenue segment growing at least 30% YoY. The mobile games revenue is growing as well, at 25% year-over-year, although still accounting for less than 10% of total revenue.
Lastly, Hayman holds 6.4% of its portfolio in API Technologies (NASDAQ: ATNY), which designs, develops, and manufactures electronic systems, subsystems, RF/microwave, secure systems, and information assurance products and solutions for defense, aerospace, and commercial applications.
API is not the easiest company to analyze due to the industry it operates (it requires a high degree of inside knowledge) and how bad the company is performing. For example, in the last quarterly earnings, API reported net loss of $27.7 million for the third quarter compared to net income of $10.4 million in the quarter ended Aug. 31, 2011. Net loss for the third quarter was impacted by a $24.3 million goodwill impairment charge and $3.0 million of restructuring and acquisition related charges. Revenues declined 1% YoY to $68.4 million vs. $77.1 million from two analyst estimates, according to Briefing research.
In addition, management announced that in response to unsolicited interest in acquiring one or more of the company's business units, API's board of directors has retained Jefferies & Co. as its financial advisor to assist the board in evaluating the unsolicited interest as well as a full range of strategic alternatives.
martinzaldua has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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!