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Top 5 Stocks from TPG-Axon

TPG-Axon first launched in 2005 as a $2.8 billion joint venture between TPG (the private equity giant) and Dinakar Singh, a former top trader at Goldman Sachs. TPG-Axon now manages some $5.8 billion across both the public and private markets. For its publicly owned securities, the hedge fund is very concentrated, with around 40% of its portfolio invested in its top five stocks. As a result, the fund must have a lot of conviction in these top picks, let's check them out.

TPG-Axon's Top Five

SandRidge Energy Inc. (SD)
is now TPG's number one stock holding after the fund increased its stake by 87% last quarter. The energy company now makes up 10.8% of the hedge fund. TPG-Axon has claimed that the company has underperformed due to strategic and management missteps. A recent "win" for the hedge fund includes its recent deal with the company to add four directors of their choosing to SandRidge's board, who will then engage with an independent firm to review land deals by management.

The hedge fund believes SandRidge has a solid asset base, but the fundamental issue is that management. TPG-Axon has also noted that it might be best is for an organization with a lower cost of capital to takeover SandRidge's asset base.

Wyndham Worldwide Corporation (WYN) is TPG's second largest holding after the fund upped its stake 93%. The hotel stock posted fourth quarter results that beat consensus, while also upping its earnings guidance for 2013. The drag on the industry of late has been a slowdown in customer spending due to a sluggish economy, this should turnaround as the economy strengthens, in turn boding well for Wyndham.

The hotel stock also pays a 1.85% dividend yield. Although the dividend yield is modest, Wyndham has showed commitment to returning cash to shareholders with its 26% dividend payment hike during the fourth quarter. What's more is that its positive cash flow generating capabilities make possible for the company to up its dividend throughout the coming years. Management expects to generate upwards of $750 million in cash flow each year going forward versus the $700 million generated in 2012.

GNC Holdings Inc. (GNC) was one of TPG's biggest increases, at 190% last quarter, and now makes up the fund's third largest holding. GNC is the specialty retailer of nutritional products including vitamins and supplements. Soft employment and weak consumer spending has previously put pressure on the industry, but a rebounding economy should help lift the stock. S&P estimates that total consumer spending will advance 2.5% in 2013, up from the 1.9% in 2012.

The real draw to GNC is its industry leading position, with over 6,000 stores, compared to top peer Vitamin Shoppe, who has only 500. GNC owns only 8% of the $29 billion vitamin market, leaving tons of room to grow.

This dollar store company Dollar General Corp. (DG) was another big increase for TPG-Axon, at 183% last quarter, and is fourth in TPG's portfolio. Dollar General is one of the top discount retailers in the U.S. Last quarter the company posted EPS that was up nicely year over year, with EPS of $0.63, compared to 0.50 for the same quarter last year, on the back of 4.0% higher same-store sales and a 10% rise in total sales.

Dollar General is expected to see same store sale growth of 3.8% in 2013 and add some 550 new stores. While the company expects to generate higher traffic and sales from offering more consumable products, it also plans to increase its health and beauty offerings. The company has not only been great at increasing traffic and growing store count, but also increasing average price per customer. The company has managed to increase sales per square foot from $163 in 2007 to $213 in 2012.

Spirit Realty Capital Inc. (SRC) is TPG's fifth-largest holding after the stock IPO'ed during the fourth quarter of last year; the real estate investment trust was previously backed by TPG-Axon and Macquarie Group as a private company Spirit is a self-managed real estate investment trust investing in single-tenant real estate in the U.S. The REIT tends to focus on triple net leases for restaurants, retailers, fitness centers, auto dealers and movie theaters.

Over 98% of the company's assets are free-standing triple-net properties, with the weighted average lease term for the portfolio being over 11 years. However, the REIT pays a mere 0.41% dividend yield, but recent news show that the company plans to merge with Cole Credit Property Trust II. This will give the combined company an interest in over 2,000 properties in 48 states. Although Cole Credit will be the majority owner of the new company with a 56% stake, Spirit management will run the company. This should be a long-run positive for the REIT and allow it the combined company to pay a much higher dividend yield.

Don't Be Fooled

TPG-Axon has taken an activist role in battling SandRidge to rearrange management and hopefully unlock value for shareholders. TPG-Axon has the support of a few heavy hitters in the hedge fund industry backing them, including billionaire Leon Copperman who bought up 24 million shares during the fourth quarter, and Fairfax Financial now owns 32 million after upping its stake 650% in in the fourth quarter. Other big bets hinge on a rebounding economy and consumer spending. These include Wyndham and GNC; however, TPG-Axon's bet on Dollar General should perform well despite the economic backdrop. Additionally, its investment in Spirit will hopefully pay out with higher dividends in the near future.

Be sure to check out our detailed stock analysis (click here).

About the author:

mdhargrave
Investment adviser and startup striver.

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