Related tickers: American International Group Inc (NYSE:AIG), Delphi Automotive (NYSE:DLPH)
The most striking feature of Monarch Alternative Capital is that, despite being a $5.4 billion hedge fund, its equity portfolio is quite small, and is very concentrated. The top five take up 83.3% of the entire portfolio. The fund focuses on distressed debt and bankrupt companies and maintains a research and event-based strategy. According to the 13F filing from 4Q 2012, the fund added three new positions, which, not surprisingly, are in the top five. So, as a two-for-one, we’re going to look at the top five holdings in Monarch Alternative Capital and the new positions, because, hey, it’s always important to track hedge funds for their market-beating potential.
With 46.37% of the portfolio, American International Group Inc (NYSE:AIG) holds the top spot and is a recent addition to the fund with 1.185 million shares. With a 3.44 beta, American International Group Inc (NYSE:AIG) is very sensitive to market fluctuations, which, given the recent run-up in the broader market, explains why the stock is up nearly 10% since the start of the year. Unfortunately, American International Group Inc (NYSE:AIG) continues to be plagued by ghosts of its recent past, namely, the government bail-out of the insurer in 2008. A lawsuit against the government by former CEO Hank Greenberg, and very aggressive attempts by management to return American International Group to its former glory by shedding noncore assets and risky investments has prevented the company from focusing on establishing a more substantial advantage over its competitors.
At number two is Delphi Automotive PLC (NYSE:DLPH). The vehicle parts manufacturer recently underwent an aggressive restructuring that eliminated much of its unprofitable European businesses. Even though DLPH is going to have to absorb the cost of this restructuring to the tune of at least $300 million, the longer term outlook is remains bullish. Analysts maintain a buy recommendation for the stock despite weak 4Q earnings in which total revenues fell by 3.2%. DLPH’s global presence, its market share in government-required auto parts and low cost labor expense makes it a very attractive stock.
Third on the list is US Concrete Inc (NASDAQ:USCR). 4Q earnings for USCR were clearly a disappointment as net income fell to from -$11.7 million to -$25.7 million as production costs rose 16%. But the outlook for the stock remains relatively upbeat, evidenced by the performance of the stock. The USCR price has gained 51% since the start of the year and its Aridus Rapid Drying Concrete was awarded the 2013 Most Innovative Product Award by the Concrete Industry. And of course there’s the improvement in the construction industry, which is giving a lift to home-building and construction stocks.
At number four, and another new addition with 4,271 shares, is Core-Mark Holding Company, Inc. (NASDAQ:CORE). Core Mark sells fresh and broad-line supply products such as tobacco, candy, snacks, health and beauty products and beverages to the convenience and grocery store industry. Because of the factors that contribute to steady income growth within this sector, CORE enjoys bullish fundamentals including a trailing price/earnings ratio of 18x versus the industry average of 73.5x and a very low debt to equity ratio. The 4Q earnings report illustrated the financial strength of the company as well as its ability to keep costs low as a percentage of sales. As a result, the bottom line improved from $26.2 million to $33.9 million.
Finally, at number five, is LyondellBasell Industries NV (NYSE:LYB), a chemical company that turns liquid and gaseous hydrocarbon feedstock into plastic resins and other chemicals. LYB released 4Q earnings in which net income improved 32%. Lyondell also recently announced that it is spending up to $1 billion to expand their existing facilities (to capitalize on the drop in natural gas prices) that will help boost productivity and generate as much as $500-$600 million in annual pre-tax earnings. Currently at 3x book value, the stock is still priced very competitively to the rest of the petro-chemical sector.
Monarch Alternative Capital’s tactic to invest heavily in only a few stocks may seem like a very risky strategy, at least on the long-only equity side. If just one of these positions, say, for example, a company vulnerable like US Concrete, should take a hit on disappointing construction data, the return on the equity portfolio may suffer. Even American International Group Inc (NYSE:AIG), despite their much more conservative management, is not immune to the volatility in the financial markets. To see the entire Monarch Alternative Capital portfolio, check it out on Insider Monkey.
Disclosure: I do not own any of the stocks mentioned in this article.
