On Wednesday, Reuters reported that hedge funds overall have lost an average of 2% over the first half of the year, while the S&P gained around 6%. Below the average are unexpected names like John Paulson (flagship fund down 15%), David Einhorn (Greenlight Capital down 5%), and Bill Ackman (Pershing Square Capital down 2.27%).
Yet at least one manager has outshone them – Daniel Loeb. He is the founder of the $7.1 billion hedge fund Third Point LLC, which has had an annualized return of 19% since inception in 1996. Year to date, his fund has gained 6.3%, after losing 2.9% in June. His portfolio has climbed because he took a slightly different tack this year than other top investors. For example, only 7.6% of his fund is invested in battered financials, down from about 14% in the fourth quarter. He completely sold out his shares of Citigroup (NYSE:C) in the first quarter of 2011.
Loeb’s position concentration for his top 20 stocks is 38% long and 23% short.
His top holdings are Delphi Corp., El Paso Corp. (EP), Gold (GLD), CIT Group Inc. (Mult. Sec.) (NYSE:CIT) and Technicolor (Multi. Sec.) (TCH). His “Top Winners” for the month were CVR Energy (NYSE:CVI), Short A, Volkswagen AG (ADR) and two unnamed asset backed securities.
CVR Energy (NYSE:CVI)
Sugarland, Texas-based CVR energy owns an oil refinery and nitrogen fertilizer plant. Year to date, CVR’s stock price is up 67.7%.
In the first quarter 2011, CVI had turned itself around after a dismal first quarter in 2010. It reported net income of $45.8 million on net sales of $1.2 billion, compared to a net loss of $12.4 million on net sales of $894.5 million a year ago. Operating margins, however, have declined from 10.3% in 2007, to 4.4% in 2010.
The company spent $7.2 million in expenses related to the purchase of Canadian crude oil and start up activity on a TransCanada pipeline in progress since 2010. The company will benefit from the profits made on cheaper oil.
CVR also unlocked shareholder value by issuing a public offering of its fertilizer business which now trades on the NYSE under UAN. CVR subsidiaries still owns 69.8% of the business. The spin-off’s stock has risen 32% since its IPO in March.
Loeb said in his first quarter shareholder letter that his firm purchased the stock in November 2010, suspecting that the company might do a spin out.
Both the petroleum and fertilizer businesses are going strong. The petroleum side generated earnings of $91.7 million in the first quarter 2010, compared to negative adjusted earnings of $4.4 million last year. The nitrogen fertilizer side generated earnings of $25.9 million, compared to adjusted earnings of $8.8 million a year ago.
“The outlook for CVR’s refining business is likewise strong,” Loeb wrote in his first-quarter 2011 investor letter. “The facility recently underwent an extensive upgrading process and is ideally located to take advantage of the oil supply/demand imbalance in the Cushing market. In short, increased supply of oil is flowing into Cushing, and there is presently inadequate take‐away capacity in this market. The result has been that WTI oil prices are at a large discount to oil delivered at other locations, creating the prospect of windfall profits for refineries in this region, as the competition in other regions must source higher‐cost oil. We think that this imbalance should persist for at least the next twelve‐to‐eighteen months (and quite possibly much longer). As a result, we are very constructive on mid‐continent refineries. Further, netting the value of the fertilizer spin, we believe we are creating the CVR refinery operation at a 50% discount to the mid‐continent comparables.”
Third Point owns 7.3 million shares as of March 31, 2011 at an average cost of $17 per share; on Wednesday, the stock traded at $25.45 a share. Only two other gurus own CVR – David Tepper and Joel Greenblatt.
Volkswagen AG (ADR)
Europe’s largest automaker, German company Volkswagen, also controls Audi, Lamborghini, Bentley and other luxury car companies. Vehicle deliveries for the first five months of 2011 topped 3 million for the first time, representing a 17% increase, and its North American car sales grew 19.7%. Volkswagen’s Jetta is the No. 14 best-selling car in the US. Volkswagen wants to sell more cars in the US and opened a new plant in Tennessee in May which will employ 2,000 workers.
Volkswagen trades on the pink sheets and its stock’s price has risen 32% year to date. “…in recent years, this low-rent corner of the market [Pink Sheets] has been in some classy company,” “ Major global corporations are putting their shares on the Pink Sheets, in large part to avoid the cumbersome paperwork required by the Securities and Exchange Commission (SEC). Fear not. These companies are subject to rigorous regulatory scrutiny back in their home markets and have little incentive to cheat investors,” says GuruFocus writer David Sterman in an article entitled, “Why Serious Investors Should Pay Attention to Pink Sheet Stocks.”
By comparison, Ford (F) stock has declined by 16% and GM by 15% year to date. Nonetheless, Morgan Stanley boosted its rating for the auto industry from “In-line” to “Attractive” in July. Americans purchased 11.6 million cars and trucks in 2010, and that number should reach over 13 million in 2011.
In the first quarter 2011, Volkswagen’s sales revenue rose over 30 percent to €37.5 billion. Vehicles sold exceeded 2 million in a single quarter for the first time, and the company’s cash and cash equivalents equal $20.4 billion.
“We again expect uneven development in the global automotive markets in 2011. In some Western European countries, rising public debt and the end of subsidy programs will have a negative impact on demand for new vehicles. By contrast, we expect an increase in new vehicle registrations in Central and Eastern Europe. The positive trends will continue in the strategically important markets of China and India, and we also expect demand to rise further in the markets of North and South America. Overall, global demand for passenger cars is expected to exceed the level for 2010,” Volkswagen said in its first-quarter Interim Report.
Daniel Loeb does not have to report how many shares he owns of Pink Sheets companies.
El Paso Corp. (EP)
El Paso Corp explores for, acquires, develops and produces natural gas and oil through two core businesses – pipelines and exploration and production. As the nation’s leading natural gas pipeline franchise, it transports more than a quarter of the nation’s natural gas each day. Recently, it has expanded to Brazil and Egypt.
Loeb listed his second top stock, El Paso Corp., as his third top loser for June. Yet his third worst stock only lost about 4% for the month and has gained 73% over the last year. Loeb bought 11 million shares in the first quarter of 2011 at an average price of $16.45 per share, and on Thursday the stock traded around $20.43.
The company had peak capital spending of $4.2 billion in 2010. It says it used the money “in support of our Pipeline Group’s backlog,” which it hopes have updated by the first half of 2011. Increased pipeline activity should restore its financial strength and return it to an investment grade profile post-2008. El Paso’s 2010 net income was $758 million, compared to a loss of $539 million the previous year. Gross margins and net margins are their strongest ever.
Gold, Loeb’s third largest position, is up 7.5% year to date and 26.6% over the last year to $1,530 an ounce on Thursday. Higher crude oil prices and a weaker US dollar worked to send the price up. The EU debt crisis has depreciated the euro somewhat, but the dollar has not gained significantly as a consequence, which benefits gold. The EU crisis also positively affects gold prices as uncertainty influences many investors to seek a safe haven in gold.
On Thursday, Bank of America Merrill Lynch raised its forecast for gold prices for the remainder of 2011 and 2012, anticipating more low interest rates and slower global growth. It expects gold prices to increase 5.3% to $1,498 per ounce in 2011, and $1,550 per ounce in 2012.
"We maintain a positive view on gold prices as many problems in the global economy have still not been resolved; debt and fiscal issues in developed countries are for instance unlikely to find a short-term fix," said the bank said on Thursday in a June 6 report.
Loeb owns 225,000 shares of gold. He last bought 52,000 in the first quarter 2011 at an average price of $135.39. The remainder of his gold holdings are likely in physical gold, which he is not required to report.
Rounding out Loeb’s top five stocks are Delphi (No. 1), CIT Group Inc. (multiple securities) (No.4) and Technicolor (multiple securities) (No. 5), which are either private or not listed.
Paulson & Einhorn
John Paulson, on the other hand, has 29.7% of his portfolio in financials, including Citigroup (almost flat) and Bank of America (NYSE:BAC) (down 18%) in his top six holdings. His third largest holding, Transocean (NYSE:RIG) fell 10%. Of course, the Sino-Forest saga, during which he lost a reported $500 million, likely did the most harm.
Since most of David Einhorn’s stocks are doing well or essentially flat, most of his troubles probably lie in his short positions or other investments. In his first quarter 2011 letter, he mentioned that his five biggest losers for the quarter were all shorts (as of March 31, 2011, Greenlight had an average exposure to equities and fixed income of 106% long and 68% short). Moody’s (NYSE:MCO), for instance, advanced almost 50% year to date. Although he is not required to report whether he still owns that position to date, in his letter he said he kept his “highest conviction older ideas (including MCO and St. Joe (NYSE:JOE)).”
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