Barry Rosenstein founded Jana Partners in 2001. The firm’s tagline is, “Ignore the crowd” – a sentiment that can be easily seen in the firm’s management. Barry Rosenstein uses a value-oriented, event-driven investment style. Sometimes he bets on the jockey, other times the horse, but he frequently comes out a winner. In 2007, Jana Partners returned just 7.9%, followed by a 23.4% loss for 2008. The fund was able to bring in returns of 23.9% in 2009, but it still wasn’t enough to recoup its 2008 losses. Jana Partners turned things around in 2010, recovering its 2008 losses and returning 8.4%. The strong performance continued. By October 2011, Jana Partners had returned a whopping 200% since its inception.
Even now, Jana Partners’ portfolio continues to grow. The fund had had $1.71 billion invested across 25 positions at the end of the third quarter. By the end of the fourth quarter, the number of funds Jana Partners invests in had increased to 30 and the volume of its investment in those positions to $2.30 billion. The largest of these holdings is Marathon Petroleum Corp (MPC). Jana Partners had $553.84 million in the company at the end of the fourth quarter, or 16.64 million shares. The position accounts for 5.5% of Marathon, making Jana Partners its largest shareholder. The fund also has the options, exercisable February 17, to buy 896,000 more shares at $27.50 each.
When trading closed on February 17, Marathon was trading at $43.44 a share. We believe Marathon is a solid long-term pick. The company has a mean one-year target estimate of $51.00 a share (range $42 to $60) and pays a $1.00 dividend (2.30% yield). The $15.49 billion market cap Marathon is also priced low at just 8.7 times its 2012 earnings. What we like most about MPC is its 28% expected EPS growth rate over the next five years. The stock should double over the next few years if the company manages to match analysts’ expectations.
Compared to a similar sized company in its industry, like Valero Energy (VLO), Marathon is better long-term bet. Valero, which has a $13.98 billion market cap, has a 2012 forward PE ratio of 7 and is expected to grow its earnings by around 15% annually over the next five years. Valero was downgraded by RBC Capital Markets from top pick to outperform on December 8 and we wouldn’t be surprised to see analyst recommendations concerning the stock slip even further. We should note that investors clearly don’t believe in analysts’ growth estimates for both stocks. Otherwise these stocks would have much higher PE ratios.
Barry Rosenstein is also bullish about McGraw Hill Companies (MHP). His Jana Partners owned 8.79 million shares in the company at the end of the fourth quarter, valued at $395.47 million. McGraw-Hill, which is also a favorite for Leon Cooperman’s Omega Advisors, had been Jana Partners’ largest position at the end of the third quarter. At that point, the fund owned 10.22 million shares. Its stake was valued at roughly $419.09 million at the end of September. Rosenstein sold out of roughly 1.5 million shares in the company during the fourth quarter. Jana Partners’ position in the company is still sizable – McGraw-Hill weighs in as the second largest in the Jana Partners portfolio as it stood at the end of the fourth quarter. McGraw-Hill was trading at $46.27 a share when the markets opened on February 17, with a mean one-year target estimate of $51 a share (range $48 to $55). The company also pays a dividend of $1.02 (2.20% yield) and is priced low at 12.59 times its forward earnings. Compared to competitor Pearson (PSO), our money is with McGraw-Hill. Pearson was trading at $19.54 when the markets opened on February 17, on a mean one-year target estimate of $19.90. The company pays roughly the same dividend yield as McGraw-Hill, offering investors 44 cents a share (2.30% yield), but between the lack of upside and a forward P/E of 15.09 we aren’t buying.
We like McGraw-Hill. The numbers may not be as good as they could be but the company is in for some big changes very soon, like its split into McGraw-Hill Education and McGraw-Hill Markets – a move that will allow the company to specialize its operations and increase shareholder value and that Rosenstein was instrumental in developing. We think the company is priced well enough, with enough upside, that it is worth the risk to hold it for a few years to see what happens with the company division.
Barry Rosenstein’s Jana Partners cut its stake in El Paso (EP) drastically during the fourth quarter. Jana Partners had owned 17.33 million shares in the company, collectively valued at $302.91 million, at the end of the third quarter. The fund owned a 5.07 million stake share worth $134.60 million at the end of the fourth quarter. However, despite the massive reduction, El Paso slipped from Jana Partners’ second largest position at the end of September to weigh in as the fund’s third largest position at the end of December. At this point El Paso is a risky merger arbitrage play. Kinder Morgan offered to buy the stock for more than $29 per share. The stock is currently trading at $27. Jana Partners also owned significant stakes in Apple (AAPL), Liberty Media (LMCA) and Expedia (EXPE) at the end of the fourth quarter.
