He declared in the letter: “We should demand that the Fed start commenting — in their beautiful prose — on the value of the dollar. They also need to start normalizing interest rates carefully, while developing intelligent policies to deal with the possible resultant decline in many asset prices (possibly balanced by optimism in the increased probability of sound money policies in the future). Until interest rates are normalized, capital will continue to be misallocated throughout the economy, real investment ‘risk’ will be almost impossible to determine and a firm foundation for solid growth in the American economy cannot be created.”
The outcome of the November election further diminished his confidence in the potential for growth, he said in a November speech at the Archstone Partnerships annual meeting, and his greatest fear is hyperinflation.
In recent years, Singer’s hedge fund has been flipping entire companies – buying, restructuring and then selling them to larger companies.
Elliott’s stock portfolio contains 41 stock, valued at $3.11 billion, with 11 new buys in the third quarter. His most-invested sector is consumer cyclical, which accounts for 40.5%, followed by energy at 4.7%.
His largest new buys in the third quarter are: France Telecom SA (FTE), Reed Elsevier NV (ENL), Nexen Inc. (NXY) and American Capital Agency Corp. (AGNC).
France Telecom (FTE)
New purchase France Telecom takes the sixth top spot in Singer’s portfolio and is weighted at 2.9%. He bought 7,371,552 shares of the company at an average of $13 a share. The price of the stock has since dropped about 18 percent from his purchase price and has dropped 30 percent year to date.
France Telecom is a Paris-based multinational telecommunications company that has 221 million customers globally. The company became public in 1997 and the French government reduced enough of its stake that it was no longer a majority shareholder in 2006.
Also in 2006, France Telecom rebranded all of its products under one name, Orange. As of May 24, 2012, the French government still owns 13.45% of the company.
France Telecom’s top line has fluctuated over the past five years, with an overall average decline rate of 1.5%. Earnings have increased each of the past three years, and reached $5.16 billion in 2011. Free cash flow has been in decline for the past four years, though it has been positive throughout the decade.
The company’s gross margin has eroded over the past decade, while its net margin increased slightly:
In its outlook for 2013 and 2014, France Telecom named several headwinds it is facing: a deteriorating macroeconomic outlook, strong competition in the French mobile market and continued regulatory pressure.
The company says it will continue to adapt and keep its market share, though additional pressure will be exerted on its operating cash flow, which it expects to remain above 7 billion euros. The trend, it says, will reverse in 2014 as operations improve, labor costs stabilize, regulatory pressure eases, and its Chrysalid programme (a multi-year operating cost reduction plan implemented in November 2011 on concerns that operating costs would grow faster than revenue by 2015) produces savings.
In the third quarter of 2012, the company saw a 3.1% year-over-year increase year over year in customers, after two quarters of declining numbers, and a 1.1% year-over-year decrease in consolidated revenues due to a decline in mobile services in France and other parts of Europe. Its mobile market share remained unchanged at 37.4% in France.
Reed Elsevier NV (ENL)
Singer bought 4,420,403 shares of Reed Elsevier NV for $25 per share on average in the third quarter, which equates to a 1.9% weighting in his portfolio. The stock’s price went up 18% from his purchase price and went up 27% year to date. In Wednesday trading it is priced at $29.42, near a 52-week high of $29.74.
Headquartered in London and Amsterdam, Reed Elsevier is a provider of scientific and professional information solutions and owns LexisNexis legal and professional information service and Reed Exhibitions, the world’s largest events business, among other business segments.
In the first nine months of 2012, the company’s underlying revenue grew 4%, with growth in each of its five business segments. The results placed it on track to meet its full-year underlying revenue and profit growth expectations.
Confronted with an uncertain economic environment, the company is making changes through “organic development” and by selling businesses that no longer fit its strategy. It plans to use the money it makes from the divestments to buy back shares. This year, the company will spend 250 million pounds on share repurchases.
Reed Elsevier has a P/E of 14.74, P/B of 5.9 and P/S of 1.2.
Nexen Inc. (NXY)
Singer’s firm introduced Nexen Inc. to its portfolio in the third quarter with 1.95 million shares, for which it paid an average of $23 a piece. The new holding occupies 1.6% of his portfolio.
Since Singer bought the stock, its price has increased 16%; year to date it gained 68%, with its trend line experiencing a sharp rise on July 20. A share costs $26.74 in Wednesday trading.
NXY data by GuruFocus.com Nexen is an upstream oil and gas company focusing on developments in the UK North Sea, offshore West Africa, the Gulf of Mexico and Western Canada.
The sudden increase in the company’s stock price is explained by a buyout offer made that day by CNOOC Limited (CEO), the largest independent offshore oil and gas producer in China. CNOOC offered Nexen $27.50 per common share, a 61% premium from Nexen’s closing price on July 20, 2012, in cash.
CNOOC plans to enhance Nexen’s assets, establish Calgary as one of its international headquarters and begin trading on the Toronto Stock Exchange. The closing of the transaction is still subject to applicable government and regulatory approvals.
American Capital Agency Corp. (AGNC)
For his third largest new holding, Singer bought 3.1 million shares of American Capital Agency Corp. The position is 1.1 percent of his portfolio. The stock has declined about 8.6% since he bought it and has gained 12.5% year to date after falling off 52-week highs it reached in September.
American Capital Agency Corp. is a mortgage real estate investment trust (REIT) that was organized in January 2008 and is managed and advised by American Capital AGNC Management LLC, an indirect subsidiary of a public private equity firm and global asset manager, American Capital Ltd. (ACAS). AGNC invests in agency securities where a U.S. government agency or a U.S. government-sponsored agency has guaranteed the principal and interest payments.
As of Sept. 30, 2012, AGNC’s portfolio consisted of $89.6 billion worth of mortgage-backed securities, reflecting an increase from $54.7 million at Dec. 31, 2011.
AGNC’s revenue and net income since 2008 have increased each year. Free cash flow increased to $1.02 billion in 2011, from a negative $19.61 million in 2010. The company’s dividend, its primary objective, has seen a great increase since 2008. As a REIT, it must pay out 90% of its taxable income annually:
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