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Holly LaFon
Holly LaFon
Articles (8167) 

Jeremy Grantham Goes For Merger Arbitrage and South America in Top Q3 Investments

November 13, 2012 | About:
Jeremy Grantham, board chairman of investment management firm Grantham Mayo Van Otterloo (GMO) which has $104 billion in client assets, has provided his third quarter portfolio update. New stocks bought for the portfolio totaled 136, the largest of which are Nexen Inc. (NXY), Cencosud SA (CNCO), Amerigroup Corp (AGP), Shaw Group (SHAW) and Arcos Dorados Holdings Inc. (NYSE:ARCO). Known as much for a disciplined, value-oriented approach as for accurately predicting market bubbles, Grantham appeared on Charlie Rose in October to share his insights on the economy. When asked what he will do the money in his funds, Grantham responded:

“I am going to be careful, particularly for the first half of next year. Great brands of blue chips are not so bad in the U.S. Emerging countries are about fair price. Beaten-down European stocks, particularly the so-called value stocks, are probably a little cheap, although risky. And resource stocks, once they reflect the weak economy—and we’ll get another whack-down—will be a wonderful long-term purchase. Farmland and forests, which should be the backbone of any long-term, serious portfolio. … It will also be a good time to buy in.” (Read the interview here.)

Nexen Inc. (NXY)

Granatham bought 1,412,200 shares of Nexen Inc. for $23 each on average. He previously held a position in the company but sold out most recently in the second quarter of 2011.

Nexen is a global energy company with conventional oil and gas assets in the UK, Gulf of Mexico, Canada, Poland, offshore West Africa and elsewhere. Its stock gained almost 53% year to date.

The stock’s year-to-date gain included a large jump on July 23 when the company announced it would be acquired by CNOOC Limited in an all-cash price of $27.50 per common share. That price was a 61% premium on its July 20 share price. The total transaction value will be $4.3 billion and the deal is expected to close in the fourth quarter of 2012.

Cencosud SA (CNCO)

Granatham bought 1,156,000 shares of Cencosud for $18.50 each on average.

Cencosud is one of the largest retain conglomerates in Latin America and is 60.9% family-owned. Its stock declined 4.25% year to date.

In the second quarter, Cencosud’s revenues increased 22% year over year, driven by a consolidation of two acquisitions, double-digit same store sales in Argentina and the effects of 82 new stores opened since the same period last year. Net income fell 43% year over year due to higher SG&A and non-operating losses from increased financial costs and larger foreign exchange variation losses.

Amerigroup Corp (AGP)

Grantham bought 194,075 shares of Amerigroup for $88 each on average. He had just sold out a smaller position in the company last quarter.

Amerigroup is a health insurance company that manages publicly funded health programs for financially vulnerable members of society. Its stock gained almost 55% year to date.

The stock’s year-to-date gain included a large jump on July 9 when Amerigroup announced it would be acquired by WellPoint (WLP). WellPoint is paying $92 per share in cash for Amerigroup, for a total cost of $4.9 billion. The transaction is slated to close in the first quarter of 2013.

Shaw Group (SHAW)

Grantham bought 402,000 shares of Shaw Group for $36 each on average.

Shaw Group is a services company to the energy, chemicals, environmental, infrastructure and emergency response industries with fiscal year 2012 revenues of $6 billion. The company’s stock increased almost 63% year to date.

The stock’s gain included a large jump in July when it announced a merger agreement with CB&I (CBI) in which it would be acquired for approximately $3 billion, or $46 per share in cash, to create “one of the world’s largest engineering and construction companies focused on the global energy industry,” according to the company.

Arcos Dorados Holdings Inc. (NYSE:ARCO)

Grantham bought 919,100 shares of Arcos Dorados for $14 each on average. He had just closed out a position in the company in the first quarter of 2011 at a higher price.

Arcos Dorados is the Argentine operator of McDonald’s franchises, with 1,840 restaurants in 20 Latin American countries, and the largest restaurant chain in Latin America. Its stock declined 47% year to date.

On Nov. 2 the company reported a third quarter 2012 revenue decrease of 2.2% year over year to $961.9 million, a 12% decrease year over year in EBITDA to $83.6 million and net income was $32.6 million compared to $19.6 million a year ago when the company faced debt restructuring charges.

The company said in its earnings release that third quarter results suffered from low consumer activity in Brazil, geopolitical and macroeconomic headwinds, which also caused it to revise downward its full-year guidance. With its restaurant opening plan and regional footprint expansion, it expects to capitalize on rapid population growth and the emerging middle class in target markets.

See the rest of Jeremy Grantham’s buys and sells in his portfolio here. Also check out the undervalued stocks, top growth companies and high yield stocks of Jeremy Grantham.

Rating: 3.5/5 (10 votes)


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