5 Stocks Which M&A Experts Pentwater Capital Management Are Heavily Betting On

Pentwater Capital Management is an Evanston, Illinois-based, multi-billion dollar equity hedge fund founded by Matthew Halbower in 2007. Prior to founding Pentwater, Mr. Halbower served as a Senior Portfolio Manager at Deephaven Capital Management LLC until December 2006. Mr. Halbower specializes in event-driven investing, distressed securities and merger arbitrage. Pentwater Capital Management recently submitted its 13F filing with the Securities and Exchange Commission for the reporting period of September 30. The filing revealed that Pentwater’s U.S equity portfolio at the end of September was worth $11.4 billion, a significant decline from the $18.85 billion that it was worth at the end of June. The filing also revealed that the fund had a fairly high turnover of 80.45% in its portfolio during the third quarter and that Pentwater’s top-ten equity holdings accounted for 57.68% of the value of its equity portfolio. Since Pentwater has notable expertise in merger and acquisition deals, in this post we will go through the top five stocks on which the fund was invested in on September 30, all of which have M&A-related activity surrounding them.

Matthew Halbower -Pentwater Capital

Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 53 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. a 49% gain for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

#5 Baker Hughes Incorporated (NYSE:BHI)

– Shares Owned by Pentwater Capital Management (as of September 30): 8.25 Million

– Value of Holding (as of September 30): $429 Million

While shares of Baker Hughes Incorporated (NYSE:BHI) enjoyed a strong first four months of the year, they have suffered a gradual decline since then and trade down by 5.4% year-to-date. During the third quarter, when the stock lost 15.4%, Pentwater Capital Management upped its stake by 20%, which pushed Baker Hughes Incorporated (NYSE:BHI) up eight spots quarter-over-quarter to become the fund’s fifth-largest holding at the end of September. On November 24, reports emerged that Jeffrey Ubben’s ValueAct Capital sent a letter to its BHI shareholders highlighting that Halliburton Company (NYSE:HAL) will do ‘whatever is necessary’ to gain approval from antitrust authorities for its $34.6 billion acquisition of Baker Hughes Incorporated. ValueAct Capital was Baker Hughes Incorporated’s largest shareholder among the funds covered by Insider Monkey at the end of September, with ownership of over 23.24 million shares of the company.

#4 Altera Corporation (NASDAQ:ALTR)

– Shares Owned by Pentwater Capital Management (as of September 30): 13.85 Million

– Value of Holding (as of September 30): $693.61 Million

It is not hard to understand why Pentwater Capital Management increased its stake in Altera Corporation (NASDAQ:ALTR) by 23% during the third quarter. The company has been one of the best performing semiconductor stocks this year, up by almost 44%, with most of the gains coming before Intel Corporation (NASDAQ:INTC) announced that it would be buying Altera Corporation (NASDAQ:ALTR) for $16.7 billion on June 1. At the recently concluded Credit Suisse Technology Conference, Intel Corporation (NASDAQ:INTC)’s CEO Brian Krzanich, spent considerable time explaining why Altera Corporation is a great fit for Intel Corporation. On October 23 , analysts at Deutsche Bank reiterated their ‘Hold’ rating and $54 price target on Altera’s stock. D E Shaw, founded by billionaire David E. Shaw, also increased its stake in Altera Corporation during the third quarter, by 152% to 4.7 million shares.

#3 Precision Castparts Corp. (NYSE:PCP)

– Shares Owned by Pentwater Capital Management (as of September 30): 3.33 Million

– Value of Holding (as of September 30): $763.78 Million

Precision Castparts Corp. (NYSE:PCP) was a new addition to Pentwater Capital Management’s portfolio during the third quarter. On August 10, legendary investor Warren Buffett‘s Berkshire Hathaway announced that it would be buying the aircraft parts manufacturer for $37.2 billion, the largest amount of money Berkshire Hathaway has ever paid to acquire a company. Following that announcement, shares of Precision Castparts Corp. jumped by more than 20%, recovering most of the losses they suffered during the first-half of the year. The deal is expected to be completed by the first quarter of 2016. Apart from Pentwater, Billionaire John Paulson’s Paulson & Co also initiated a stake in Precision Castparts Corp. (NYSE:PCP) during the third quarter; it bought 1.0 million shares of the company during that period.

#2 Time Warner Cable Inc (NYSE:TWC)

– Shares Owned by Pentwater Capital Management (as of September 30): 5.33 Million

– Value of Holding (as of September 30): $956.11 Million

After increasing its stake in Time Warner Cable Inc (NYSE:TWC) by 89% during the second quarter, Pentwater Capital Management reduced its stake by 3% during the third quarter. However, Time Warner Cable still managed to jump a spot quarter-over-quarter to become the fund’s second-largest holding by the end of September. Shares of Time Warner Cable have been range-bound since a brief rally in May, when smaller rival Charter Communications, Inc. (NASDAQ:CHTR) announced that it would be buying the company in a deal valued at $78.7 billion. Although both companies expected the deal to be approved by the end of this year initially, due to regulatory hurdles they now expect it to be completed sometime in 2016. Thomas Steyer‘s Farallon Capital increased its stake in Time Warner Cable Inc (NYSE:TWC) by 53% to 3.38 million shares during the July-to-September period.

#1 Broadcom Corporation (NASDAQ:BRCM)

– Shares Owned by Pentwater Capital Management (as of September 30): 22.1 Million

– Value of Holding (as of September 30): $1.13 Billion

Finally, with the acquisition of DIRECTV having been completed in July, Broadcom Corporation (NASDAQ:BRCM) emerged as Pentwater Capital Management’s largest equity bet at the end of September. The fund initiated a stake in Broadcom Corporation (NASDAQ:BRCM) during the second quarter and in the third quarter, hiked its position by another 7%. Shares of Broadcom Corporation have mostly traded in the $50-to-$55 range ever since Avago Technologies Ltd (NASDAQ:AVGO) announced on May 27 that it would be acquiring Broadcom for $37 billion. However, they have recently broken that range on the upside and now trade up by over 32% year-to-date. On December 3, Canaccord Genuity reiterated its ‘Hold’ rating on the stock, while upping its price target on it to $59 from $54.50. Andreas Halvorsen‘s Viking Global initiated a stake in Broadcom Corporation during the third quarter and became the company’s largest shareholder among the funds covered by us as of the end of September.

Disclosure: None