Elliott Associates was founded by Paul Singer in 1977, making it one as the oldest hedge funds under continuous management. It, together with Elliott International Limited, form the Elliott Management Corporation, which manages roughly $15 billion of capital for large institutional investors and wealthy individuals alike. Elliott International Limited was launched in 1994 and managed to beat the S&P 500 index by around 5 percentage points per year on the average since its inception. Elliott Associates also has a similar track record. Before founding his fund, Paul Singer earned a BS in psychology from the University of Rochester and a JD from Harvard Law School. After that, Singer spent the next four years working in corporate laws firms and the investment bank Donaldson, Lufkin & Jenrette before founding Elliott Associates.
Elliott Associates takes an activist approach to investment, meaning that the fund will take on significant, but minority, stakes in companies that are distressed or underperforming, and attempt to affect change within the company’s management to deliver the greater shareholder value possible. It looks specifically to corporate, real estate, and sovereign debt, while concentrating its investments in North America, Asia, and Europe, frequently buying debt, then selling it at a profit.
That fact was evident in the fund’s 13F filing February 14, 2012. The Elliott Management portfolio reported 130 positions, with a total value of roughly $2.92 billion. This is a fair increase from last year. Elliott Management’s 13F filed on February 14, 2011 showed just 80 positions at a value of just under $1.40 billion. Elliott Management’s portfolio, as it stood at the end of December, showed a wide range of positions, from put and call positions, to bonds and common stocks. Several of Singer’s stock picks in particular caught our eyes.
At the end of the fourth quarter, one of Elliott Management’s largest positions was in Iron Mountain Inc. (IRM). Elliott Associates and Elliott International had $262 million invested in the company at the end of December. Iron Mountain, which is also a top pick for Richard Perry’s Perry Capital, was trading at $30.66 when the markets opened on February 14. Analysts expect its share price will hit $34.67 in the next year (range $32 to $39). In addition to the upside, Iron Mountain pays a $1.00 dividend (3.30% yield) and has a low 0.84 beta. Right now, it is priced at 23.08 times its forward earnings. Over the last 52 weeks, Iron Mountain has returned 14.81%, handily beating out the S&P 500’s 1.79% for the same period.
Iron Mountain is priced similar to its peers. One of the comparable stocks, Cintas Corp (CTAS), has a slightly smaller market cap ($4.94B vs. Iron Mountain’s $5.66 billion) and a lower forward P/E ratio at 15.54, but doesn’t have anywhere near the upside. Cintas opened trading on February 14 at $37.10 a share on a mean one-year target estimate of $37.10. Cintas does pay a dividend, but it is roughly half of what Iron Mountain pays, at 54 cents a share (1.40% yield). Cintas is also more volatile, with a beta of 0.95. Overall, we don’t like any of these stocks. There are other stocks in the market with lower forward PE ratios and higher expected growth rates. Iron Mountain has a short history of dividend payments, so we think it’s early to recommend the stock as a dividend play.
Paul Singer’s Elliott Management was also bullish on Brocade Communication Systems (BRCD) in the fourth quarter. It had $227 million invested in the company at the end of December. Brocade was trading at $5.70 when the markets opened on February 14. It has a one-year target estimate of just $5.83 (range $4 to $10), and it doesn’t pay a dividend. The Kaufman Brothers initiated a hold opinion on January 27. The company is priced at 9.85 times its forward earnings. Over the last 52 weeks, Brocade has lost 0.70%, compared to a gain of just under 2% for the S&P 500 index.
We aren’t bearish about Brocade but we would rather go for its competitor Cisco Systems (CSCO). Cisco has the higher market cap by far ($106.47B vs. Brocade’s $2.60B), but there is more to our preference than market cap. For one, Cisco has greater upside. It opened trading on February 14 at $19.93 a share, with a one-year target estimate of $22.59 (range $13.50 to $27). It also pays a dividend of 32 cents (1.60% yield) and is priced low relative to its future earnings, with a forward P/E of just 10.03. The stock has also gained 7.28% over the last 52 weeks. Cisco was downgraded by both MKM Partners and ISI Group on February 9 to hold or neutral, but we think the company offers a good opportunity for investors to gain 10% or more over the next year.
Other notable positions held by Elliott Management at the end of the fourth quarter include $166 million invested in News Corp (NWS) and $54 million invested in General Motors (GM). Conservative value investor Seth Klarman had a large position in NWS and David Einhorn is very bullish about General Motors. We like both stocks, they are trading at very attractive forward PE ratios but we think General Motors presents a better opportunity for investors. Significant government ownership and depressed consumer confidence has been holding the stock back. We think the stock has limited downside risks and may even double over the next three years.
