In addition to OfficeMax’s attractive FCF valuation, shares also trade at a meager price-to-earnings growth ratio of 0.44 based on the sell-side’s consensus EPS growth estimates, which expect 4-5% annual growth over the next half-decade. Driven by the company’s cost-cutting initiative to close underperforming stores, these positive expectations are a far cry from the double-digit earnings compression it has experienced over the past five years. Other hedge fund managers that were quite bullish on OfficeMax’s prospects last quarter include: Steven Cohen (+9,821%), Ken Griffin (+383%), and Cliff Asness (+44%). Check out other big bets made by Cliff Asness recently, and Ken Griffin’s top picks can be seen here.
Getting to Trapeze’s other U.S.-traded “wallflower” pick Metlife, we can see a decidedly different picture. Shares of this multi-national insurance provider have lost around 12% over the past three months, but its size alone – Metlife is America’s largest life insurer in terms of total assets – warrants investors’ consideration. Here’s what Trapeze had to say about MET:
“MetLife, like most insurance companies today, is out of favour because the prospect of higher interest rates from fixed income holdings, a key source of earnings, appears dim and the prospect of more government regulation appears likely. So this dominant international life insurance company trades at less than 6x earnings and well below book value. Our FMV estimate is over 50% higher than the share price, and growing. The company has excess capital which it and key shareholders would like returned to shareholders via dividends or share buybacks. However, the sale of its small banking operation, which is overseen by the Fed, has been holding up the process for months. While frustrating, this should be resolved shortly. Like our other large-cap holdings we are looking for a potential return to fair value in excess of 25% per year over the next 2 years.”
It’s important that Randall and Herb mentioned Metlife’s sale of its online banking business to GE Capital, which was just approved by federal regulators on December 14th. According to MarketWatch, a “GE spokesman said the deal is on track to close before year end.”
While Metlife’s current dividend yield of 2.3% is below competitors like Prudential Financial (3.1%) and Principal Financial (3.0%), the conclusion of its transaction with GE will likely be followed by a payout boost sometime in 2013, assuming that the Dodd-Frank doesn’t regulate MetLife as a nonbank systemically important financial institution. A nonbank SIFI designation would require it to maintain more stringent capital requirements, as Barron’s has discussed recently.
In the “Additions And Deletions” segment of Trapeze’s latest letter, three bullish plays are mentioned in particular: American International Group, Inc. (NYSE:AIG), Southwest Airlines Co. (NYSE:LUV), and Owens-Illinois, Inc. (NYSE:OI).
Regarding AIG, it’s important to note that the insurer was a favorite of the hedge fund industry at large in the third quarter. Of the 400 funds we track, 110 had long positions vs. 61 at the end of the second quarter, good for an 80% increase. Steven Cohen and SAC Capital Advisors were some of the biggest bulls in AIG; see Cohen’s entire portfolio here.
