Billionaire Mason Hawkins and His Team’s Thoughts on Alphabet, Level3 Communications Inc. (LVLT), More

Mason Hawkins is the CEO and founder of Southeastern Asset Management Inc. which owns a suite of mutual funds and UCITS funds under the Longleaf Partners Funds umbrella. Mason Hawkins thinks their “active management results would significantly surpass the market’s passive returns over the next five years.” He thinks that geopolitical events like Brexit and the USA elections present new investment opportunities for the fund.

Southeastern Asset Management’s team thinks that low interest rates and index investing have been dominant market themes in USA over the last few years. This has given a boost to the “perceived as safer” and high dividend yielding stocks. They stressed on the importance of stock picking and mentioned that the fund currently has high percentage of cash holdings because of the difficult trading environment. In their view, Asian stock markets have been affected due to a fear of higher USA interest rates and adverse consequences of Donald Trump’s trade policies but still Asia remains the most attractively valued region globally. In the article below we discuss some of their long ideas such as Alphabet Inc. (NASDAQ:GOOG), Chesapeake Energy Corporation (CHK), and Oci NV (AMS:OCI).

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Let’s start with Level3 Communications, Inc. (NYSE:LVLT), in which Southeastern held 28.18 million shares worth $1.31 billion (it’s largest 13F holding at the end of Septemeber. The fund thinks that the potential merger between Centurylink Inc (NYSE:CTL) and Level3 Communications, Inc. (NYSE:LVLT) would result in significant merger synergies as Qwest fibernet gets combined with Level 3’s Communications, Inc. (NYSE:LVLT) fiber network. The new combined entity would be capable of providing competition to the likes of telecom giants such as AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ).

The company also has an edge over the large telecom competitors because of its stronger global capabilities. The fund believes that the synergies would lead to a Debt/ EBITDA of less than 4x and an impressive dividend yield of 9%. The deal seems highly “achievable” and Southeastern considers that it could put Level3 Communications, Inc. (NYSE:LVLT)’s value in mid-to-high $70’s per share.

They also think that Alphabet Inc (NASDAQ:GOOG) is undervalued and like the company in spite of the fact that the company does not pay any dividend. The fund bought the stock two years ago and appreciates its evolving business model. They think that the company will do well with increased mobile penetration, its growing share in the online advertising market, stock buybacks and capital allocation. Southeastern Asset Management also praised the top management of Alphabet Inc. (NASDAQ:GOOG) which thinks unconventionally and still own large part of the company’s equity. In its latest 13F filing, Southeastern reported holding around 1.08 million shares of Alphabet’s class C stock, valued at $951.81 million at the end of September.

Southeastern Asset Management explained their methodology for valuing Chesapeake Energy Corporation (NYSE:CHK) which is to use “lower of the futures strip pricing or the marginal cost” for natural gas. Marginal cost being higher than the futures strip makes them more optimistic about the stock. The team also talked about the company’s different securities and parts of the capital structure that Southeastern Asset Management has invested into. When there were rumours about Chesapeake Energy Corporation (NYSE:CHK) filing for bankruptcy in February, the debt with the closest maturity got “ridiculously priced”. This led Southeastern Asset Management to buy the bonds of the company which was cheaper than the stock.

The fund also bought the preference stock of Chesapeake Energy Corporation (NYSE:CHK). The fund thinks that Chesapeake Energy Corporation (NYSE:CHK) is in a good position to sell its non-core assets given its “fantastic land, undrilled locations”. Chesapeake Energy Corporation (NYSE:CHK) constituted 5.4% and 11.7% in Longleaf’s Partners Fund and Global Fund respectively, at the end of September.

The share price of Oci NV (AMS:OCI) has suffered from a fall in nitrogen prices over the last year and due to recent changes in tax rules. However, the demand and supply is expected to stabilise more towards late 2017. Southeastern Asset Management thinks the construction of any new plant by Oci NV (AMS:OCI) in the medium term looks highly improbable. The fund believes that OCI Partners’ LP (NYSE:OCIP) upcoming Iowa plant is the “most strategic fertilizer asset in the United States”. The company should benefit from higher free cash flow generation owing to “lower capex, full year earnings from Iowa plant, and methanol plant coming online late next year”. The fund is thus optimistic about their future returns in Oci NV (AMS:OCI) stock.

Southeastern Asset Management views CNH Global NV (NYSE:CNH) as well positioned compared to its closest competitor Deere & Company (NYSE:DE). According to the team, both companies are very close in terms of brand, distribution and product technology. The reason why Southeastern Asset Management prefers CNH Global NV (NYSE:CNH) is because of its cheap valuation.

The management is focused on achieving investment grade rating which will not only release excess capital but also improve its valuation and reported earnings. The company’s commercial truck and construction equipment business should also benefit from an increase in demand and with cost structure optimization. Southeastern Asset Management thinks highly of the promoters (John Elkann and his family) who have a 30% stake in CNH Global NV (NYSE:CNH). They are smart capital allocators with a focus on increasing the value per share.

Disclosure: None

Correction: An earlier version of this article incorrectly alluded that Southeastern Asset Management held shares of Centurylink Inc (NYSE:CTL) and misidentified Oci NV (AMS:OCI) as OCI Partners LP (NYSE:OCIP).